Risk Management in Islamic Finance

Risk Management in Islamic Finance
Brill’s Arab and

Islamic Laws Series
Editorial Board
H.H. Prof. Eugene Cotran
Mark Hoyle
Martin Lau
VOLUME 1
Risk Management in
Islamic Finance
An Analysis of Derivatives Instruments
in Commodity Markets
By
Muhammad al-Bashir Muhammad al-Amine
LEIDEN • BOSTON
2008
This book is printed on acid-free paper.
Al-Amine, Muhammad Al-Bashir Muhammad.

Risk management in Islamic finance : an analysis of derivatives instruments in
commodity markets / by Muhammad Al-Bashir Muhammad Al-Amine.
p. cm. — (Brill’s Arab and Islamic laws series, ISSN 1871-2894 ; v. 1)
Includes bibliographical references and index.
ISBN: 9789004152465 (hardback : alk. paper) 1. Commodity exchanges—Law and
legislation. 2. Commodity exchanges—Religious aspects—Islam. Finance (Islamic
law) Option (Contract law, Islamic) Sales (Islamic law) Risk management—Religious
aspects—Islam.
KBP962.8 .A43 2008

332.64/4091767 22
2008029640
ISSN 1871-2894
ISBN 978 90 04 15246 5
Copyright 2008 by Koninklijke Brill NV, Leiden, The Netherlands.

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CONTENTS
List of Tables ......................................................................................... ix

List of Statutes ...................................................................................... ix
List of Cases .......................................................................................... ix
Acknowledgments ................................................................................ xi
List of Contemporary Scholars .......................................................... xiii
The Islamic Fiqh Academies .............................................................. xix
Transliteration ....................................................................................... xxi
Chapter One Introduction ............................................................ 1

Background of the Research ........................................................ 1
Objectives of the Research ........................................................... 7
Research Methodology ................................................................. 8
Scope and Limitations of the Study ........................................... 10
Outline of Chapters ....................................................................... 12
Distinctive Features of the Research .......................................... 14
Literature Review ........................................................................... 15
Forward and Futures Contracts .................................................. 15
Options Contracts ......................................................................... 35
Chapter Two The Forward Commodities Market ..................... 44

Economic Benefits of the Forward Contract ............................ 45
Istiṣnāʿ and the Forward Contract .............................................. 61
Ibtidāʾ Al-Dayn Bi Al-Dayn and the Forward Contract ......... 63
Bayʿ Al-Ṣifah and the Forward Contract ................................... 65
Nonexistence of the Subject Matter and the Forward
Contract ...................................................................................... 67
Chapter Three Is it Permissible to Exchange Gold with

Paper Money on Forward Basis? ................................................ 72
Historical Sketch of the World Monetary System .................... 72
Critical Analysis of Several Fatwās on Gold Trading .............. 75
The ʿIllah behind Trading Gold unless Its Hand to Hand ...... 84
The Effect of the ʿIllah in Gold to Its Trade on a Forward
Basis ............................................................................................. 87
vi contents
Chapter Four The Forward Market for Currencies ................... 94

Basic Rules of Currency Exchange and Paper Money ............ 94
Mutual Promise in Currency Exchange ..................................... 103
Mutual Loan and Currency Risk Management ........................ 109
Currency Basket and Risk Management ................................... 110
Managing Price Fluctuation through Deposit .......................... 111
Cooperative Funds and Currency Risk Management ............. 111
THE FUTURES MARKET
Chapter Five Concept, Scope of Futures Contracts and

Speculation ..................................................................................... 121
Concept of Futures Contracts .................................................... 121
Characteristics of a Succesful Futures Market .......................... 123
Futures Contracts and Forward Contracts ................................ 124
A Brief History of the Commodity Market .............................. 130
Scope of the Futures Market ........................................................ 133
Economic Benefits of Futures Contracts ................................... 134
The Clearinghouse and the Futures Market .............................. 139
Hedging and the Futures Market ................................................ 141
Speculation and the Futures Market .......................................... 143
Speculation and Financial Crises ................................................ 150
Arbitrage and Speculation ............................................................ 155
Margin Trading and Speculation ................................................ 157
Chapter Six Sale Prior to Taking Possession, Sale of Debt

and Futures Contract .................................................................... 159
Juristic Debate over Sale prior to Taking Possession .............. 159
The Meaning of Taʿām .................................................................. 164
Salam and the Futures Contracts ............................................... 165
Parallel Salam and the Futures Market ...................................... 167
Chapter Seven Futures Market Regulation ................................. 177

Intermediaries in the Futures and Options Market ................. 177
The Fidelity Fund .......................................................................... 180
Futures Market Regulation .......................................................... 181
Trading Offences Under the Futures Industry Act and
Islamic Law ................................................................................ 186
contents vii
THE OPTIONS MARKET
Chapter Eight Concept and Scope ............................................... 195

Concept of Options ....................................................................... 195
Definition ........................................................................................ 196
Economic Benefits of Options ..................................................... 198
American and European Options ............................................... 203
Types of Options ........................................................................... 204
Exchange Traded and Over-The-Counter Islamic Options .... 206
A Brief History of Options Trading ........................................... 207
Scope of Options ........................................................................... 208
Options and Gambling ................................................................. 210
Chapter Nine Khiyār Al-Sharṭ , Risk Management and

Options ............................................................................................ 222
Concept of Khiyār Al-Shart ̣ ......................................................... 223
The Terms of Khiyār Al-Shart ̣ ..................................................... 224
Ownership of Commodity During the Period of Khiyār and
Libiality for Damage ................................................................. 226
Managing Price Risk with Khiyār Al-Shart ̣ ............................... 228
Khiyār Al-Naqd .............................................................................. 234
Chapter Ten ʿArbūn Risk Management and Options ............... 237

The Legal Status of Bayʿ Al-ʿArbūn ............................................. 241
ʿArbūn in Currency Exchange or ṣarf ........................................ 242
ʿArbūn in Commodities and Services ........................................ 242
ʿArbūn in Shares Trading ............................................................. 244
ʿArbūn in Murābaḥah .................................................................... 245
ʿArbūn in Salam ............................................................................. 250
ʿArbūn in ʿIstiṣnāʿ ........................................................................... 251
ʿArbūn as the Islamic Alternative to Options ........................... 252
ʿArbūn as an Alternative to Call Option .................................... 253
ʿArbūn as an Alternative to Put Option ..................................... 254
Does Options Trading Involve the Combination of Two
Contracts in One Transaction? ............................................... 264
viii contents
Chapter Eleven The Sale of Pure Rights and the Legality

of Options ....................................................................................... 266
Concept of Māl or Property ........................................................ 273
Haqq Al-Nuzūl ʿAn Al-Wazāʿif and the Sale of Rights ............ 276
Huqūq Al-Irtifāq and the Sale of Rights .................................... 278
Badal Al-Khulu and the Sale of Rights ...................................... 280
Sale and Exchange of the Right of Precedence ........................ 282
Intellectual Property and the Sale of Right ............................... 284
Right to Option in Khiyār Al-Sharṭ and Right of Shuf ʿah
or Pre-Emption as Property Rights ........................................ 287
Sale and Exchange of the Right to Option in Khiyār
Al-Sharṭ and the Right to Pre-Emption or Shuf ʿah ............ 290
Exchange of Right to Bargain for Purchase of Commodity ... 294
Sale of a Right By a Wife To Have Her Husband With Her ... 295
Earning an Exchange For Waiving the Right To Hadānah .... 295
Earning an Exchange For Waiving a Right ............................... 296
Conclusion .......................................................................................... 299
Glossary of Arabic Terms ................................................................. 309
Bibliography ........................................................................................ 319
Index .................................................................................................... 329
Abstract ............................................................................................... 333
‫ﻣﻠﺨﺺ اﻟﺒﺤﺚ‬ .......................................................................................... 338

LIST OF TABLES
1.1 Opinion of Major Schools on the Conditions of Salam .... 53
2.2 Comparison Between Futures and Forward Contracts ..... 126
LIST OF STATUTES
Company Act 187
Futures Industry Act 11; 12; 18; 159;

161; 162; 187; 240;
241; 242; 143; 245;
247; 252; 254; 258
Securities Industry Act 11; 12; 247
LIST OF CASES
Sydney Futures Exchange Ltd v. Australian Stock Exchange

Ltd (1995) 13 ACLC 369 .................................................................. 121
Richardson Greenshields of Canada(Pacific) LtD v. Keug

Chak-kiu and Hong Kong Futures exchange LtD (1989)
1 HKLR 476 ........................................................................................ 210
ACKNOWLEDGMENTS
All praise to Allah (s w t) the most Gracious and most Merciful, by

whose grace and blessing the original manuscript of the present book
has been submitted as a thesis for the requirement of Doctor of Phi-
losophy in Laws.
I also take this opportunity, while relying on the instruction of the
Prophet to the effect that: “whoever does not thank people does not
thank Allah”, to express my profound gratitude to my supervisor Prof.
Dr Mohammad Hashim Kamali, for his invaluable assistance, guidance,
tireless advice and encouragement throughout the writing of this dis-
sertation. His advice and criticism have been of great value in sustain-
ing this work. May Allah reward him and give him long life to serve
the Muslim Ummah. Special thanks and appreciations are also due to
Brother Dr Abdul Kabir Hassan for his valuable help and assistance.
Moreover, I would to take this opportunity to thank the authorities
of International Islamic University Malaysia (IIUM) specially the Faculty
of Laws for giving me the chance to study in this unique university.
May Allah reward them for their contribution.
LIST OF CONTEMPORARY SCHOLARS
Muhammad Taqi Usmani is a retired Justice of the Shariʾat Appellate

Bench, Supreme Court of Pakistan and is globally recognized for his
contribution to Islamic Finance. He is Chairman of the Shariah Board
of Accounting and Auditing Organization of Islamic Financial Institu-
tions (AAOIFI) and a permanent member of OIC Islamic Fiqh Acad-
emy. Sheikh Taqi Usmani advises a number of international financial
institutions.
Mohamed Ali El-Gari is a professor of Islamic Economics at King

Abdul Aziz University. He is an expert at the Islamic Jurisprudence
Academies of the Organization of Islamic Conference and the Islamic
World League. Dr. Elgari is member of Shariah Boards of many Islamic
Banks and Takaful Companies.
Abdullah Bin Suleiman Al-Maniya is a member of the Senior Ulema

Board in Saudi Arabia since its inception. Sheikh Abdullah is a member
of Shariah Supervisory Committees of various Banks in Saudi Arabia
and around the world.
Abdul Sattar Abu Ghuddah is the Shariʾah Advisor and Director,

Department of Financial Instruments at Al-Baraka Investment Co. of
Saudi Arabia. He is an active member of Islamic Fiqh Academy and
the Accounting & Auditing Standards Board of Islamic Financial Insti-
tutions. Dr. Abdul Sattar advises a number of international financial
institutions around the world.
Ahmad Bazie Al-Yaseen was former Chairman of Kuwait Finance

House from 1973 to 1993. He was also Chairman of Abdullah al-Nouri
Charity Society and member of the Shariah and Islamic Studies Faculty
in Kuwait University. Sheikh Ahmad Bazie Al-Yaseen is the former
treasurer of the International Islamic Charity Committee and former
General Secretary of Social Reformation Society. He has been a board
member of Islamic University Haidarabad Pakistan, Faisal Islamic Bank
in Sudan and also the Central Bank of Kuwait. He is also a former
economic consultant for the OIC and was a member of the Chamber
of Commerce and Industry in 1970.
xiv list of contemporary scholars
Ajeel Jasem Al-Nashmi is a Professor of Shariʾah in Kuwait University

and Chairman of Zakat House’s Shariah Committee in 2005. He is
currently a member of the Shariah Board for AAOFI (Accounting and
Auditing Organization for Islamic Financial Institutions) in Bahrain.
He has also been a member of the Fatwa Committee for the Ministry
of Awqaf and Islamic Affairs in Kuwait. Dr. Ajil advises a number of
international financial institutions around the world.
Muhammed Ali Al Taskhiri is Secretary General of the World Forum

for Proximity of Islamic Schools of Thought, Islamic Republic of Iran.
Wahba Mustafa Al-Zuhalli is former Dean of the Department of

Shariʾah, University of Damascus, Syria and member of Shariah Board
of several Islamic financial institutions.
Ahmad Ali Abdullah is Secretary General of the Higher Council of

the Shariʾah Supervisory Board, Sudan. He also advises a number of
international financial institutions around the world.
Mohammad Mukhtar al-Salami is the former Grand Mufti of Tuni-

sia. He has authored many books and article on Islamic studies and
he is a member to the Shairah Board of a number of Islamic financial
Institutions and Member of the Islamic fiqh Academy affiliated to the
Organization of Islamic Conference.
Ali al-Salus Professor of Shariah at Qatar University and Member

of the Islamic fiqh Academy affiliated to the Organization of Islamic
Conference. He has contributed a number of articles and books on
Islamic finance.
Sayyid Abdul Jabbar Shahhabudin, Former Chief Executive of the

Kuala Lumpur Commodity Exchange.
Nazih Hammad is a former Professor at the College of Shariah, Um

Alqura University in Saudi Arabia, Member of the Islamic Fiqh Acad-
emy, Jeddah, S. A. (Organization of Islamic Countries). He also advises
a number of international financial institutions around the world.
Obiyathullah Associate Professor at the Faculty of Economics and

Business.
list of contemporary scholars xv
Zamir Iqbal is an Information Officer in the World Bank’s Treasury.
Saleh al-Marzuqi Professor of Shariah Um al-Qura University and the

secretary general of the Islamic fiqh Academy affiliated to the World
Muslim League—Saudi Arabia.
Abd Allah bin Beya of the leading contemporary Muslim scholars. He

is a professor at King Adul Aziz University and member of the fiqh
Academy of the Organization of Islamic Conference.
Abd al-Wahhab Abu Sulaiman, member of the Council of Great scholar

Saudi Arabia and former dean of the faculty of Shariah Um al-Qura
University Saudi Arabia.
Siddq Al-Darir Professor at the faculty of Laws Khartoum university,

Sudan member of a number Islamic fiqh Academies and Shariah Adviser
to several Islamic financial institutions.
Fahim Khan is associated with the Islamic Research and Training

Institute (IRTI) since 1988 serving at various positions. Fahim Khan
has more than 10 books and monographs on Islamic economics, bank-
ing and finance.
Umar Charpa is currently serving as Research Advisor at the Islamic

Research & Training Institute (IRTI) of the Islamic Development Bank
(IDB). Before joining IRTI in 1999, he worked as Senior Economic
Advisor at the Saudi Arabian Monetary Agency (SAMA) from where he
retired after a long service of 35 years. He has made seminal contribu-
tions to Islamic Economics and Finance over more than three decades
in the form of ten books and monographs and more than seventy papers
and book reviews.
Mohammad Hashim Kamali is currently Professor of Islamic law and

jurisprudence and Dean of the International Institute of Islamic Thought
and Civilization (ISTAC) at the International Islamic University Malay-
sia, Kuala Lumpur. Professor Kamali has published 13 books and over
80 academic articles.
xvi list of contemporary scholars
Rafiq al-Misri is member of the faculty of economics and Management

King Abdul Aziz University and researcher at the Center of Islamic
Economics. Dr. Al-Misri contributed a dozen of books and Articles on
Islamic economics and finance.
Abdel-Hamid al-Ghazali member of the faculty of economics and

political sciences, Cairo university. He was the Director of the Islamic
Research and Training Institute, Islamic Development Bank form 1981
to 1985. He has a number of publication on Islamic economic and
finance.
Mohammed Obaidullah is a Senior Economist with the Islamic Research

and Training Institute, Islamic Development Bank at Jeddah, Saudi Arabia.
Prior to this he also served the Islamic Economics Research Center,
King Abdulaziz University, Jeddah, Saudi Arabia and taught at the
International Islamic University Malaysia and the Xavier Institute of
Management, India.
Muhammad Akram Khan is a Pakistani scholar of Islamic law with

outstanding works on Islamic economic and finance.
Obaiyathullah Ismath Bacha Professor at the faculty of economics and

Management, International Islamic University Malaysia.
Omar Jah is a Gambia national. Dr. Omar Jah taught in many Universi-
ties around the world and member of many Islamic organizations.
Abd al Salam Al-Abadi is Jordanian national and he is currently the

rector of Al al-Bayt University. He held a number of high positions in
his country including Minister of Awqaf. He has a number of publica-
tions in Islamic law.
Monzer Kahf is a Professor: Islamic Economics and Banking. He is

currently a consultant and trainer on Islamic finance and economics
in the USA. He was before a Senior Research Economist at the Islamic
Research and Training Institute (IRTI) of the Islamic Development Bank
(IDB). Jeddah, Saudi Arabia, from 1985–1999. He wrote several books
on Islamic finance and banking and other areas of Islamic economics.
list of contemporary scholars xvii
Sudin Haron is a Malaysian national. He is currently Dean of School

of Banking and Finance, University Utara Malaysia. He authored in
number of books and published a dozen of articles in economics and
finance.
Frank E. Vogel is the Custodian of the Two Holy Mosques Adjunct

Professor of Islamic Legal Studies and Director of the Islamic Legal
Studies Program at Harvard Law School. His writings include Islamic
Law and Legal System: Studies of Saudi Arabia (Boston: Brill, 2000),
and, with Samuel L. Hayes III, Islamic Law and Finance: Religion, Risk
and Return (Kluwer Law International, 1998). He has taught courses on
the Islamic legal system, contemporary Islamic legal thought, Islamic
contract law, Islamic constitutional history, human rights and Islam,
and the comparative law of the Arab Middle East.
Samuel L. Hayes holds the Jacob H. Schiff Chair in Investment Bank-

ing, at the Harvard Business School, Emeritus. He has taught at the
School since 1971, Professor Hayes’ research has focused on the capital
markets and on the corporate interface with the securities markets. He
has written numerous working papers and articles on related topics in
various repute journals.
Hassan al-Jawahiri, Shariah scholar from the Islamic republic of Iran

and professor at al-Hawjah al-Ilmiyyah at Qum, Iran. He is also member
of the Islamic Fiqh Academy.
Youssouf al-Qaradawi is one of the renowned and influential contem-

porary Muslim scholars and president of the Union Muslim Scholars.
He wrote hundreds of books and article on Islamic thought.
Jamal al-Din Atiyyah Professor of constitutional law at the Faculty of

Shariah and Law university of Qatar. He was a visiting professor in a
number of universities and consultant on Islamic banking issues to a
number of organizations.
THE ISLAMIC FIQH ACADEMIES
Islamic Fiqh Academy (Majmaʿ al-Fiqh al-Islāmī) is an affiliated

institution of the of the Organization of Islamic Conference (OIC). it
was established by Resolution No.8/3-C, (I.S.) adopted by the Third
Islamic Summit Conference, held in Makkah Al-Mukarramah and Taif
(Saudi Arabia) called for the establishment of an Islamic Fiqh Academy.
The Headquarters of the Academy is located in Jeddah, Kingdom of
Saudi Arabia. Almost all 57 Muslim countries are represented in the
Academy.
The objectives of the Academy are:
1. To achieve the theoretical and practical unity of the Islamic Ummah

by striving to have Man conform his conduct to the principles of
the Islamic sharīʿah at the individual, social as well as international
levels.
2. To strengthen the link of the Muslim community with the Islamic
faith.
3. To draw inspiration from the Islamic sharīʿah, to study contempo-
rary problems from the sharīʿah point of view and to try to find
the solutions in conformity with the sharīʿah through an authentic
interpretation of its content.
The Islamic Fiqh Academy (al-Majmaʿ al-Fiqhī al-Islāmī-Mecca) is

an academic body with a legal personality belonging to the Muslim
World League. It was established based on a decree of the Constituent
Council in 1398 Hejriah. It consists of an assorted group of Islamic
Jurists from around the Muslim world.
The Fiqh Council examines new issues facing Muslims, in order to
show the rulings of Al-Sharīʿah educed from the Qur’an and the Sun-
nah. The main objective of the Academy are:
1. To present appropriate solutions non opposing to Islamic Laws

(sharīʿah) for contemporary problems of the Muslims
2. To project the supremacy of Islamic Laws over man made laws
3. To spread and disseminate the Islamic Fiqh
4. To show all related laws of sharīʿah to those Muslims who ask
xx the islamic fiqh academies
The Accounting and Auditing Organization for Islamic Financial

Institutions (AAOIFI), is a based in Bahrain organization. It is a
self-regulatory standard-setting body that issues accounting, auditing,
governance, ethics and sharīʿah standards for Islamic financial institu-
tions. To date, AAOIFI has issued more 50 standards and statements,
which are mandatory in Bahrain, Sudan and Jordan, and form the basis
for regulatory standards in several other countries, including Qatar
and Saudi Arabia. The standards are also used as reference by Islamic
financial institutions around the world.
The Council of Great Scholars is a national Saudi body established in
1971 by a Royal Decree. It is composed of sharīʿah scholars from Saudi
Arabia appointed by royal decree. The Council gives opinion based on
the interpretation of the sharīʿah covering different aspects of life as
referred to the council by the Kingdom authorities.
TRANSLITERATION
Consonants
‫ب‬ b ‫ط‬ ṭ
‫ت‬ t ‫ظ‬ z
‫ث‬ th ‫ع‬ ‘
‫ج‬ j ‫غ‬ gh
‫ح‬ ḥ ‫ف‬ f
‫خ‬ kh ‫ق‬ q
‫د‬ d ‫ك‬ k
‫ذ‬ dh ‫ل‬ l
‫ر‬ r ‫م‬ m
‫ز‬ z ‫ن‬ n
‫س‬ s ٥ h
‫ش‬ sh ‫و‬ w
‫ص‬ ṣ ‫ء‬ ’
‫ض‬ ḍ ‫ي‬ y
Vowels and Diphthongs
A ā ‫ى‬ ā ‫ة‬ in pause form ah
i ‫ي‬ ī ‫ْي‬ ay ‫ة‬ in construct form at
ُ u ‫ُو‬ ū ْ‫و‬ aw
CHAPTER ONE
INTRODUCTION
Background of the Research
The mastery of risk is a stupendous challenge. It may be regarded as the

distinguishing feature of modern times. Someone has rightly remarked
that the elimination of risk has replaced the elimination of scarcity as
a major preoccupation.
There are several risks which need to be managed by financial insti-
tutions, be they Islamic or conventional. They include, among others,
market risk, interest rate risk, credit risk, liquidity risk, operational risk,
litigation risk, regulatory risk, and foreign exchange risk. The nature of
some of these risks is briefly discussed below:
Market risk is the risk originating in instruments and assets traded
in well-defined markets. Market risks can result from macro and micro
sources. Systematic market risk results from overall movement of prices
and policies in the economy. The unsystematic market risk arises when
the price of the specific asset or instrument changes due to events linked
to the instrument or asset. Volatility of prices in various markets gives
rise to different kinds of market risks. Thus market risk includes equity
price risk, interest rate risk, currency risk, and commodity price risk.
Interest rate risk is the exposure of a bank’s financial condition to
movements in interest rates. In Islamic financial institutions, due to the
prohibition against charging and paying interest, rates are not directly
affected by risk. However, they are indirectly affected by this risk in
their bid to determine their return. Islamic financial institutions use
the London Inter Bank borrowing rate (LIBOR) as a benchmark in
their transactions. Thus, the effect of interest rates can be transmitted to
Islamic banks indirectly through this benchmark. In case of a change in
the LIBOR, the Islamic banks could face this risk in the sense of their
paying more profit to future depositors as compared to receiving less
income from the users of long-term funds.
Credit risk is the risk that a counterparty will fail to meet its obli-
gations in a timely manner and fully in accordance with the agreed
upon terms. This risk can occur in the banking and trading books of
the bank.
2 chapter one
Liquidity risk arises due to insufficient liquidity for normal operating

requirements, thus reducing the ability of banks to meet its liabilities
when they fall due. This risk may result from either difficulties in
obtaining cash at reasonable cost from borrowing (funding or financing
liquidity risk) or the sale of assets (asset liquidity risk). One aspect of
asset-liability management in the banking business is to minimize the
liquidity risk. While funding risk can be controlled by proper planning
of cash-flow needs and seeking newer sources of funds to finance cash
shortfalls, the asset liquidity risk can be mitigated by diversification of
assets and setting limits on certain illiquid products.
Operational risk may arise from human and technical errors or acci-
dents. It is the risk of direct or indirect loss resulting from inadequate or
failed internal processes, people, and technology or from external events.
While human risk may arise due to incompetence and fraud, technology
risk may result from telecommunications system and program failure.
Process risk may occur due to various reasons, including errors in
model specifications, inaccurate transaction execution, and violating
operational control limits. Due to problems arising from inaccurate
processing, record keeping, system failures, compliance with regula-
tions, etc., there is a possibility that operating costs might be different
from what is expected and therefore affect net income adversely. Given
the newness of Islamic banks, operational risk in terms of human risk
can be sometimes acute in these institutions. Operational risk in this
respect particularly arises as the bank may not have enough professional
personnel to conduct Islamic financial operations. Moreover, given the
nature of business, the computer software available in the market for
conventional banks may not be appropriate for Islamic banks.
Legal risks relate to risks of unenforceability of financial contracts.
This relates to statutes, legislation, and regulations that affect the fulfill-
ment of contracts and transactions. This risk can be external in nature,
like regulations affecting certain kinds of business activities or internal
matters related to a bank’s management or employees, like fraud, viola-
tions of laws and regulations, etc. Legal risks can be considered as a type
of operational risk. Regulatory risk arises from changes in the regulatory
framework of a country. Given the different nature of their financial
contracts, Islamic banks face risk related to their documentation and
enforcement. As there are no standard forms of contracts for various
financial instruments, Islamic banks prepare these contracts accord-
ing to the advice of their respective Shariah Board and the needs and
concerns of local laws. Lack of standardized contracts and the absence
introduction 3
of a litigation system to enforce contracts by counterparty increase the

legal risks associated with Islamic financial agreements.1
Thus, risk is an ever-present factor, especially in business, but indus-
trialization brought risks previously unknown in trade and agriculture.
Industrial production often involves long periods of time, and the longer
the period of production, the greater the uncertainty. The scope of the
market has expanded to cover the entire globe, introducing new kinds
of risk.2
In Islamic banking, the management of risk becomes more chal-
lenging due to its peculiar risk characteristics and the requirement for
compliance to Shariah principles. While the Basel II initiatives on the
identification of credit, market, and operational risks can be assimilated
into Islamic banking, the initiatives have to be complemented with
consideration of the other dimensions of risks that are inherent in the
Islamic financial transactions. The risk management infrastructure in
Islamic financial institutions needs to identify, unbundle, measure,
control, and monitor all the specific risks in the Islamic financial
transactions and instruments. This is to ensure that the systems and
controls will be effective in the quantification and management of the
risks arising from the operations.
An important aspect of risk management is the need for the Islamic
banking industry to develop a derivatives market. In the current, increas-
ingly uncertain, global financial environment, investors need to be in
a position to mitigate and manage these emerging new risks. Islamic
banking institutions, in particular, have, to a large extent, long-term
assets, which include long-term Islamic housing mortgages and Islamic
financial instruments that are funded by short-term deposits, thus giv-
ing rise to a maturity mismatch between the assets and liabilities. There
is, therefore, a need for the development of a broader range of Islamic
financial market instruments to provide the industry with effective risk
mitigating instruments.3
1
For more elaboration see Tariqullah Khan and Habib Ahmed, Risk Management:
An Analysis of Issues in Islamic Financial Industry, Occasional Paper no. 5, Islamic
Research and Training Institute, Islamic Development Bank, 2001.
2
Mohammad Nejatullah Siddiqi, “Islamic Banking and Finance,” a lecture delivered
at UCLA International Institute in a 2001 seminar for the business community.
3
Tan Sri Dato’ Sri Dr. Zeti Akhtar Aziz, “Governor’s Keynote Address” at The 2nd
International Conference On Islamic Banking: Risk Management, Regulation and
Supervision—“Building a Robust Islamic Financial System,” jointly organized by the
Islamic Research and Training Institute (IRTI) of the Islamic Development Bank and
4 chapter one
It is important to distinguish between gambling, which is not permis-

sible under Islamic law and must be avoided, along with other kinds
of risk-taking. In the words of Irving Fisher, a gambler seeks and takes
unnecessary risks. Such is the nature of games of chance. But life is full
of risky situations that cannot be avoided. Business especially involves
risk because the production of wealth involves the future, and it is
impossible to have full and certain information regarding the future.
People find mutually advantageous ways to face these uncertainties.
The economies of many Muslim countries rely to a great extent on
raw materials and commodities. The production, investment, and pric-
ing of these commodities are largely affected by the use of derivatives
for risk management and trading in the international market. Ques-
tions normally arise regarding the Islamic position in the use of these
instruments.
Derivatives markets deal in almost all the basic worldwide commodi-
ties, such as corn, wheat, cotton, crude oil, heating oil, gasoline, cocoa,
palm oil, timber, rubber, aluminum copper, zinc, nickel, tin, coffee, sugar,
etc. Hence, almost everybody feels the impact of these markets.
If we take oil, for instance, one of the world’s most important com-
modities, without which it is impossible to conduct world commerce, its
price is generally determined by the use of oil derivatives transactions.
Derivatives instruments largely evolved in a non-Islamic environment;
thus, they are loaded with values which may not be totally in compli-
ance with Islamic principles. Therefore, there is a need for a systematic
analysis of these tools of price determination as well as risk management
and hedging devices from an Islamic perspective.
More importantly, the availability of excess liquidity in many Islamic
financial institutions, which require viable and permissible channels for
investment, makes the study of these new tools of financial engineering
in the international commodities markets a timely undertaking. Many
questions arise regarding the evaluation of their compliance or dishar-
mony with Islamic principles and the possibilities for new avenues of
investment for Islamic financial institutions.
Furthermore, the widely held opinion that derivative instruments
do not comply with sharīʿah regulations whether due to ribā (interest),
gambling or other illegal activities, may not be entirely accurate in regard
the Islamic Financial Services Board (IFSB). Le Meridien Hotel, Kuala Lumpur,
7 February 2006.
introduction 5
to at least certain forms of derivatives. Yet, the prevalence of this nega-

tive attitude has hindered the Islamic institutions from venturing into
areas of investment that are open to conventional financial institutions.
Therefore, it is important to address and analyze the available alternative
avenues of investment so that Islamic financial institutions do not find
themselves in a disadvantageous position.
A series of studies on the subject have been conducted by certain
Islamic institutions such as Majmaʿ al-Fiqh al-Islāmī (Islamic Fiqh
Academy based in Jeddah), al-Majmaʿ al-Fiqhī al-Islāmī (Islamic Fiqh
Academy based in Mecca), and by individual Muslim jurists. However,
despite the welcome scholarly effort made so far, there are issues which
still call for a systematic study and evaluation of the existing works and
to address the shortcomings of some of these studies and the general-
izations of others.
The present study will focus and elaborate on those issues which have
not been well elaborated by previous works or which have been excluded
from discussion despite their fundamental importance in understanding
the issue of futures trading and derivatives.
The forward contract plays a pivotal role in the modern financial
markets and serves as the basic building block for more advanced and
sophisticated financial instruments. It is one of the most commonly used
contracts in export–import trading, especially in essential commodities.
It is also an important tool in risk management and business planning.
However, in its actual form the majority of Muslim scholars declared it
not permissible because it involves the prohibited sale of bayʿ al-kāliʾ bi
al-kāliʾ (the sale of debt for debt) and the sale of nonexistent entities.
The present study will explore these principles and look at their appli-
cation to the conventional forward contract. It also draws an analogy
between the conventional forward contract and similar contracts in
Islamic law, such as salam (A sale contract to purchase an underlying
asset at a predetermined future date but at a price paid on spot), istisnāʿ
(A contract whereby a manufacturer agrees to produce and deliver a
well-described good at a given price on a given date in the future) and
bayʿ ʿala al-ṣifa (sale by description).
Trading gold on a forward basis is a sensitive and controversial issue.
The majority of scholars held that the ʿillah (effective cause, ratio legis)
behind prohibiting the exchange of gold on a deferred basis is because
gold and silver are currencies (athmān) and, therefore, should not be ex-
changed unless the exchange is hand to hand. It is maintained that the
prophetic injunctions not to trade gold and silver on a deferred basis
6 chapter one
should be upheld whether gold and silver lose their characteristic of being
thaman or not as they are money by creation. However, it is also argued
by others that if gold and silver lose these characteristics, they would be
a kind of commodity and could therefore be exchanged on a deferred
basis. Thus, there is a need to analyze the different opinions advanced
and look at their relevance to gold trading on a forward basis.
The forward currencies market is a very important mechanism in
managing price risk. However, it is commonly agreed upon among
Muslim scholars that trading currencies on a forward basis is illegal
and it contravenes the rules of ṣarf (currency exchange) in Islamic law.
Several alternatives have been suggested and there is a need to assess
the sharīʿahʾ basis of these proposals.
Although the forward contracts have been able to overcome some
of the problems associated with risk management, especially price risk
and better planning of business, they are still inadequate to meet cur-
rent business needs in some respects. Thus, the futures contract was
introduced in the modern financial system in order to overcome these
problems. A futures contract is basically a standardized forward contract
with regard to the contract size, maturity, quality, place of delivery and
the characteristic of being traded in an organized market. However,
the futures contract might contravene the principle of not selling prior
to taking possession and that of the sale of debt for debt. The present
study will elaborate on the legal aspects of these two principles and try
to find out how they could affect the legality of the futures contract.
Moreover, the study will address the relation, if any, between the futures
contract and speculation.
The futures contracts have been able to overcome some of the prob-
lems of the forward contract associated with risk, especially price risk
and better planning of business, but they are still inadequate in some
respects. The futures contracts are associated with certain problems,
such as the possibility of exposure to subsequent price movement or
their unsuitability for the management of contingent liabilities and
contingent claims. Thus, a new tool of risk management is needed and
the options contracts have been introduced due to their potential for
managing such risks. The present study will examine the legality of
options trading from an Islamic point of view by expounding on their
concept, economic benefits, types, and scope.
Khiyār al-sharṭ (the option to rescind a sales contract based on con-
dition) and its variant khiyār al-naqd (the right of either of the parties
to confirm the contract or to cancel it by means of the payment of the
introduction 7
price) seem to be the first alternative to conventional options from an

Islamic point of view. This study will address the legal basis of these
two contracts, the terms of khiyār, ownership of the commodity during
the period of khiyār, liability for damage during this period and how
khiyār al-sharṭ and khiyār al-naqd can be devised as tools to manage
risk in murābaḥ ah (Sale at a specified profit margin, ijārah (lease) or
stock trading).
Bayʿ al-ʿarbūn or ʿarbūn (a sale contract, in which a down payment
is paid by the buyer) on the other hand, could be a very effective tool
of risk management and an Islamic alternative to options. It should be
noted that although the legality of ʿarbūn was disputed among the clas-
sical Muslim jurists, there is almost a consensus among contemporary
scholars that it is a valid contract. On the other hand, asserting the legal
status of ʿarbūn is of great importance in the use of ʿarbūn as an alterna-
tive to options. Therefore, the study will investigate whether ʿarbūn is
a kind of liquidated damages or whether it is a kind of penalty or can
be used as an exchange of the right to cancel the contract.
The present study will also investigate the sale of pure rights in the
writing of classical scholars after expounding on the concept of right in
Islamic law and how it could include pure rights, like that of options.
It will also discuss the different cases involving the sale of pure rights
accepted by Muslim jurists and draw an analogy between the sale of
rights in these cases and the rights in conventional options. Finally,
the study will address the relationship, if any, between options and
gambling.
Objectives of the Research
The present study analyzes the pertinent issues on derivatives which

have given rise to differences among Muslim scholars. Included among
these derivative instruments are the forward, futures and options con-
tracts. This study will critically address their compliance or lack thereof
with Islamic principles. The study will also analyze the other Islamic
alternatives available so that Islamic financial institutions do not find
themselves in a disadvantageous position. To summarize the main
points:
• The present study attempts to investigate the possibility of admitting

the forward contract into Islamic law. This will include the forward
8 chapter one
contract in commodities, the possibility of forward contract in gold

trading and the forward contract in currencies. Thus, the study will
analyze the legal grounds of these contracts and the different opin-
ions advanced by modern scholars whether in favor of or against the
acceptance of these contracts.
• The study will also investigate the permissibility of futures contracts
by analyzing the different objections raised against the permissibility
of other related contracts, such as the sale of debt for debt, the sale
prior to taking possession, and speculation.
• An Islamic evaluation of the different functions performed by the
clearinghouse, the futures brokers, and the regulation of the futures
market is necessary for deciding the legality of the futures and options
contracts in Islamic law. Reference will be made regarding these issues
to the Malaysian Futures Industry Act and Securities Industry Act
in order to see whether these modern forms of trading comply with
Islamic principles or not.
• This study also elaborates on the permissibility of options contracts
and the possible Islamic alternative based on khiyār al-sharṭ and
bayʿ al-ʿarbūn. The sale of pure rights such as in the case of options
is generally held not to be a valid subject matter of a contract in
Islamic law. The study explores the issue based on the writing of
classical Muslim scholars. It will also draw an analogy between the
right of holding an option and other admitted rights in Islamic law
as subject matter in order to identify any similarity or dissimilarity
that may exist between them.
• Finally, the study will explore the relationship, if any, between options
and gambling.
Research Methodology
The study is based on a selective study of Islamic law. It relies on the work
of the major Sunni schools of Islamic Law, namely the Ḥ anafī, Mālikī,
Shafīe, Ḥ anbalī, Zāhirī schools and the writing of modern scholars.
Reference to the Imāmī School will only be made if it is derived from
papers presented at the Islamic Fiqh Academy (Jeddah). The study
does not support the opinion of a specific school of Islamic law and it
is not under obligation to accept the opinion of the majority. But any
opinion supported by evidence form the Qurʾān and Sunnah that could
be the basis for solving certain problems related to futures trading may
be used.
introduction 9
On the other hand, the study refers only to Malaysian Law in order to
clarify or to compare the different aspects of futures trading discussed.
In particular, references are made to the Malaysian Futures Industry Act
and the Malaysian Securities Industry Act. However, this is by no means
a comparative study; the Acts are used just for the sake of clarifying
certain concepts or as a means of paving the way for certain analysis.
Organization of the Study

This study examines the concept of Derivatives trading in conven-
tional sources on the different issues discussed, followed by the views
of Muslim scholars, the sources of law they relied upon, and a critical
analysis of these views.
Thus, throughout the study of the three different parts of derivatives

instrument trading, namely, forward, futures, and option are examined
from an Islamic point of view. The present research begins with the
definition and concept of keys terms as they are elaborated in the con-
ventional sources. Yet, as it is said in Islamic law, “a right judgment or
ruling about anything is part of its accurate conceptualization” (al-ḥukm
ʿala al-shaiʾfarʿ ʿan taṣawwurihi).
The conventional concept of derivatives trading, and in particular its

contractual aspect, is followed by the opinion of Muslim scholars on the
issue and the legal basis they advanced for its permissibility or not.
The study is nonempirical, and thus, it is based on library research. It is

a critical analysis of the contemporary writings on forward, futures, and
options trading from the Islamic point of view. It relies on the classical
sources of Islamic law to approve or disapprove of the ideas discussed.
This requires, first, an investigation into the different concepts raised in
order to invalidate derivatives instrument trading, such as bayʿ al-kāliʾ
bi al-kāliʾ or, more generally, the sale of debt where both counterval-
ues are deferred to a future date after assessing the authenticity of the
relevant “ḥ adīth” (saying, deed and approval of the Prophet) and “ijmāʿ ”
(consensus of Muslim scholars on specific issue) about it.
Regarding the permissibility of trading gold on a forward basis,
numerous arguments have been advanced on this issue. The present
study will critically analyze the divergence of opinions and the evi-
dence advanced on the issue, although a final decision would seem to
require a collective ijtihād (the intellectual effort of Muslim jurists to
10 chapter one
reach independent religio-legal decisions) due to the complexity and

sensitivity of the question. The objective from addressing this specific
issue is to state the fact that there is no economic or financial system
unless there is a clear and unambiguous concept of money.
The study will also investigate the claim that the futures contract
violate the principle of sale prior to taking possession, bayʿ al-dayn bi
al-dayn, or it involves excessive speculation. This is because it is almost
impossible to build a viable Islamic futures market without answering
these problems. The main issues addressed in the present study with
regard to options are how khiyār al-sharṭ and bayʿ al-ʿarbūn could be
defined in order to be suitable Islamic alternatives to options. More
important, the study will investigate the claim that the subject matter
of contract in option is a pure right that could not be exchanged for a
monetary value in Islamic law.
No English translation will be provided for Arabic terms which are

commonly used in English works about Islam such as Qurʾān, sunnah,
sharīʿah, ijmāʿand ḥ adīth while new terms such as “collective ijtihād”
(or legal ruling based on the opinion of a number of Muslim scholars
after discussion and consultation), ḥ aq mālī (right related to property)
ḥ aḍānah (custody), ḥ uqūq al-irtifāq (rights of easements), and taḥ jīr
(barren land) will be followed as possible by a brief English translation
to clarify their meaning. A detailed table on the meaning of Arabic is
attached for better reference.
Scope and Limitations of the Study
“The derivatives market is a market where traders buy and sell futures
and/or options contracts to receive or deliver a specified quantity and
grade of a commodity at a specified future time. The contracts are
offered by authorized Boards of Trade commonly known as commodity
exchanges.” Therefore, the scope of the present research is limited to the
forward, futures, and options contracts in commodity markets, although
at times references to shares market will also be made. Thus the forward,
futures, and options contracts on currencies, bonds, and interest rates
are not covered by this research due to their clear prohibition. Com-
modity in the present study means physical or tangible commodities,
usufruct and right and not the general concept of commodity, which
includes currencies, bonds, etc.
introduction 11
Meanwhile, although literally “right” is not a commodity, it is gener-

ally accepted in Islamic law that a right could be a subject matter of
contract and could be bought and sold as any commodity. Because of
this fact, the study of options which involve right trading is considered
as part of derivatives trading contracts in the commodity market from
an Islamic perspective. Moreover, the underlying asset in option trading
could be a commodity and, therefore, there is a genuine need to study
its legality from an Islamic point of view.
However, due to the importance of the forward currencies market
in modern finance and its clear prohibition in Islamic law due to the
involvement of ribā, several proposals on how to manage risk associated
with currency fluctuation are discussed. There are many types of options,
such as exotic options, compound options, options on options, lookback
options, and others. However, the present study is only concerned with
the basic types of options, namely, call and put options, which consti-
tute the fundamental and most widely used kinds of options. Thus, the
legality and benefit of other kinds of options depend on them. A call
option gives the holder the right to buy an asset by a certain date for
a certain price. A put option, on the other hand, gives the holder the
right to sell an asset by a certain date for a certain price.
Outline of Chapters
The present analysis begins, in the first chapter, with a critical review of
the major studies which have addressed the issue so far. The bulk of the
study is then divided into three major parts: the forward market, the
futures market, and the options market, in addition to the introduction
and the conclusion.
The first part, subdivided into three chapters, addresses the forward
market in commodities, the permissibility or otherwise of trading gold
on a forward basis, and the forward market in currencies. Consider-
ing the fact that a forward contract, as it is applied in the conventional
system, is a contract where both countervalues are deferred to a future
date, the second chapter draws an analogy between this contract and
the contracts of salam (A sale contract where two parties agree to carry
out a sale/purchase of an underlying asset at a predetermined future
date but at a price determined and fully paid on spot, istiṣnāʿ (A con-
tract whereby a manufacturer (contractor) agrees to produce (build)
and deliver a well-described good at a given price on a given date in
12 chapter one
the future and bayʿ al-ṣifah (Sale based on detailed description of the
object of sale) in Islamic law. The second chapter also investigates the
concept of bayʿal-kāliʾ bi al-kāliʾ, that, of sale of the nonexistent and
their relation with the forward contract.
Chapter 3 addresses the possibility of trading gold on a forward
basis, and starts with a brief history of the world monetary system.
That discussion is followed by a critical analysis of several fatwās on
the issue of gold trading, and then expounds on the ʿillah behind the
prohibition of selling gold on a deferred basis and its implications on
trading gold on forward basis.
The fourth chapter discusses the general rules regarding paper money
and how a forward currency exchange will involve ribā. The chapter
then proceeds to discuss the different possible alternatives to the forward
sale in currency in order to ascertain their sharīʿah basis.
The second part of this study addresses the permissibility of the
futures contract in Islamic law. Chapter 5 expounds on the different
characteristics of a futures contract as distinct from the forward contract.
This is followed by a brief history of the commodity market in general
and the Malaysian commodity futures market in particular. The chapter
touches also on the economic benefits of the futures market and some
of the major objections raised to the futures contract such as specula-
tion and financial crisis.
Chapter 6 elaborates on the assumption that a futures contract
involves sale prior to taking possession or the sale of debt for debt. The
opinion of Muslim scholars in this regard will be analyzed in order to
ascertain their relevance to futures trading.
One of the important organizational features of futures exchange is the
clearinghouse. It provides several crucial functions, such as the registra-
tion of contracts, the substitution of counterparties, the management
of physical delivery, the settlement of contracts, and the monitoring of
members’ positions. This will be the focus of chapter 7. The chapter will
also touch on the role of brokers, fidelity funds, and the trading offences
in the futures market as it is stipulated in the Malaysian Futures Industry
Act and it will assess their compliance with Islamic law.
The third part of this study comprises four chapters, all of which
address the legality of options as a tool of risk management. Chapter 8
of the study will address the concept of options, their economic ben-
efits, the difference between American and European options, major
types of options: namely, call and put options, the exchange traded, and
the over-the-counter options. It also touches briefly on the history of
introduction 13
options trading and the scope of options from an Islamic perspective.

Moreover, the chapter discusses the claim asserting that options are a
kind of gambling and provides a suitable response.
Chapter 9 focuses on khiyār al-sharṭ as a tool of risk management
and as an alternative to options. The chapter also addresses the legal
basis of this contract, the terms of the khiyār, the ownership of the
commodity during the period of khiyār, liability for damage and loss
during this period, and how khiyār al-sharṭ can be devised as tools to
manage risk in murābaḥ ah, ijārah or stock trading.
ʿArbūn can be a useful tool of risk management. Chapter 10 of the
present study investigates whether ʿarbūn is a kind of liquidated dam-
ages or whether it is a kind of penalty or an exchange of the right to
cancel the contract for monetary value. The chapter will also address
the use of ʿarbūn in currency exchange or ṣarf; ʿarbūn in commodities
and services; ʿarbūn in shares trading; ʿarbūn in murābaḥ ah (a sale at a
cost plus or with a specified profit margin) ʿarbūn in salam and ʿarbūn
in istiṣnāʿ. Moreover, it will elaborate on the possibility of using ʿarbūn
as an alternative to call and put options.
However, a successful Islamic options market would not be possible
unless the legality of selling “pure rights” in Islamic law is addressed.
This will be elaborated on in chapter 11. The chapter will analyze the
concept of the sale of pure rights in the writing of classical scholars,
after expounding the concept of rights in Islamic law and how it could
include pure rights, like that of options. The chapter will also discuss
the different cases involving the sale of pure rights that are acceptable
to Muslim jurists and draws an analogy between the sale of rights in
these cases and the right in conventional options.
Distinctive Features of the Research
One of the distinctive features of the present research is that it is selective

research whereby the study is limited to the Sunni schools of Islamic
Law. Moreover, with regard to modern legislation, reference is limited
to the Malaysian law.
The present study is a multidisciplinary study in the sense that
although it is initially a study in fiqh (Islamic law), it also includes dis-
cussions of uṣūl al-fiqh (Islamic Jurisprudence) ʿulūm al-ḥ adīth (science
of the ḥadīth), conventional law, as well as some economic concepts.
14 chapter one
Literature Review
Several institutional studies and a number of individual works have

addressed the issue of derivatives and futures trading. The present study
will divide its review of the previous studies into two sections, whereby
opinions on the forward and futures contracts will be dealt with in the
first section, while the second section will focus on options contacts.
Forward and Futures Contracts
Institutional Studies
The first institutional discussion about the legality of forward and futures
contracts was undertaken by the Makkah-based Fiqh Academy.4 This
present study will summarize the main points of the Academy’s resolu-
tion and point out its shortcomings. The Academy acknowledges the
benefits of forward and futures trading as follow:
• Forward and futures contracts provide opportunity for industrial and

commercial institutions to finance their projects through the issuance
and sale of stocks and financial instruments.
• They also provide a permanent venue for traders in commercial
instruments and commodities.
However, this clear maṣlaḥ ah (Public interest as determined in the

light of the rules of Shariah) according to the Academy’s resolution is
accompanied by transactions which are forbidden in the sharīʿah, such
as gambling, exploitation, and the unlawful devouring of the property
of others. The major objections to forward and futures contracts could
be summarized as follow:
• Forward and futures contracts are by and large paper transactions and
not genuine purchases and sales as they do not involve the delivery
or taking of possession of their underlying commodities.5
4
For the complete text of the resolution, see Al-Majmā ʿal-Fiqhī al-Islāmī li-Rābitạ t
al-ʿĀlam al-Islāmī, Qarārāt Majlis al-Majmāʿ al-Fiqhī al-Islāmī, seventh session, from
11–16 Rabiʿ al-ʾĀkhīr, 1404, “Sūq al-ʾAwrāq al-Māliyyah wa al-Badāiʾi (al-Būrṣah),”
pp. 120–124.
5
Ibid.
introduction, literature review 15
• They entail oppressive practices on the part of those who engage in

them through a kind of monopoly by making large sales and purchases
of contracts in commodities, only to force smaller traders to take a
loss and suffer hardship as a result.
• Forward and futures trading tends to bring about price distortion.
Price is not entirely the function of market forces of supply and
demand or genuine purchases and sales by parties who need to con-
clude a certain transaction. A variety of other factors are known to
cause unnatural price fluctuation. These include not only cornering
and profiteering by the market participants, but also false rumors and
the like, which are detrimental to economic life and unacceptable
from the viewpoint of the sharīʿah.
• Some economists have even called for the abolition of forward and
futures contracts due to a number of historical events and crises that
played havoc in the world economy and inflicted devastating losses
on market participants at short notice due to the practice of these
instruments.
Having highlighted the advantages and disadvantages of futures con-

tracts, the Academy added that in view of these considerations and in
the light of the relevant information on the nature of futures market
transactions in financial instruments and commodities from the Islamic
perspective, we observe that the benefits of futures markets are mixed
with disadvantages which contravene the principles of the sharīʿah.
The Academy maintains that spot transactions, in which delivery
takes place and the seller sells a commodity that he owns and which
exists at the time of contract, are clearly valid from the sharīʿah point
of view, provided that the transaction does not involve transactions or
trading in unlawful substances such as alcohol.6
The Academy continues its argument that deferred contracts, which
are concluded on the basis of a description of the asset and commod-
ity which the seller does not own, are unlawful. This is because a per-
son sells what he does not own but concludes the sale in the hope of
subsequently purchasing the subject matter of the contract in order to
make delivery later. This is forbidden in sharīʿah on the authority of the
ḥ adīth in which the prophet PBUH said, “Sell not what is not with you.”7
Also, it is reported on the authority of Zayd Ibn Thābit that the prophet
6
Ibid.
7
Abū Dāʾūd, Sunan, vol. 3, p. ḥ adīth no. 2187.
16 chapter one
PBUH prohibited the sale of a commodity which is bought unless the

traders take it into their possession and carry it.”8 Thus, according to
the Academy the forward and futures contracts that are concluded in
the commodities market do not qualify as salam sales, which the
sharīʿah has validated. There are two reasons to support this:
• Forward and futures do not involve the payment of the price by the
buyer at the time of the contract, which is a requirement in salam.
• Futures involve the sales of assets that have become personal obliga-
tions on the part of the parties involved. The first buyer in the chain
does not receive the underlying commodity and such is the case with
every other sale that follows suit. They all tend to be involved in giv-
ing or taking price differentials, like gamblers who undertake risks in
a zero sum game in order to procure profit. In salam, on the other
hand, the buyer is not permitted to sell prior to taking possession of
the underlying commodity.9
It should be noted that despite the fact that the Academy acknowledges
that futures trading involves different kinds of contracts, which need
to be addressed separately, this is not reflected in its resolution. It is
nevertheless clear that the contracts in stock indices are different from
those in currencies or bonds and all these are quite different from
those in commodities and shares. Moreover, the possibility of selling a
purchased item before taking possession, or the sale of the salam before
taking delivery are not explored despite the fact that many Muslim
jurists have opted for their legality. Furthermore, the reason behind the
possibility of deferring the price of salam in the Mālikī school has not
been taken into consideration. Thus, the Academy resolution did not
examine the different views that are available in the classical fiqh and
has not attempted to come up with new alternatives that will guarantee
the benefits it has recognized. However, it should be noted that our criti-
cisms are based only on the resolution of the Academy. Unfortunately,
we did not examine the different papers delivered in this session so as
to obtain an accurate and precise evaluation.
8
Al-Ḥ ākim, al-Mustadrak, Dār al-Maʾrifah, Beirut, vol. 3, pp. 39–40; Abū Dāʾūd,
Sunan, Dār Iḥyāʾ al-Sunnah, Cairo, vol. 3, p. 283.
9
See Al-Majmāʿ al-Fiqhī al-Islāmī li-Rābiṭat al-ʿĀlam al-Islāmī, Qarārāt Majlis
al-Majmaʿ al-Fiqhī al-Islāmi, “Sūq al-ʾAwr āq al-Māliyyah wa al-Badāiʾi (al-Būrṣah),”
pp. 120–124.
The position of the Islamic Fiqh Academy based in Jeddah regarding

the stock market practices in general and derivative instruments trading
in particular had evolved through different seminars and workshops
where several papers were presented. However, in the seventh meeting
of the Academy in Jeddah, a special session was devoted to the issue of
derivative instruments trading. This session presented the main position
of the Academy regarding futures trading, since the final resolution
was issued thereafter. However, even the previous meetings had some
merit in our evaluation of the Academy’s stand. One may discover some
personal views of the participants in these different meetings.
The first time the issue of futures trading was raised was in the sixth
session in Rabat, Morocco, in 1989. However, no final resolution was
reached although the general benefit of such a trade was recognized in
the final communiqué and a call for further research on the issue was
made. However, the single paper which discussed certain issues concern-
ing options and futures was Mohamed Ali Elgārī’s paper.
Concerning commodity forward and futures contracts, El-Gārī main-
tained that:
• Although there are some similarities between the forward and futures
contracts on one hand and bayʿ al-salam on the other, in salam the
price must be paid at the time of the conclusion of the contract, which
is not the case in forward or futures contracts.
• The transaction, he added, will be a kind of bayʿ al-kāliʾ bi al-kāliʾ,
which is prohibited.
• El-Gārī pointed out that if we consider salam as a contract in accor-
dance with qiyās (analogy), then there is room for the admissibil-
ity of these contracts. Unfortunately, he did not elaborate on this
possibility.
• He also argued that in futures contracts, the commodity in the first
contract could be sold prior to taking possession, which is not the
case in salam. However, he added that there is room for approving
such transaction since some scholars did not see any legal problem
in selling the salam prior to taking possession. El-Gārī once again
did not expound this possibility. He raised the point that the ʿillah or
cause of prohibition of many contracts here is risk-taking or gharar.
It is a complex issue, he added, which needs a careful investigation in
relation to the modern types of contracts. Unfortunately, he did not
proceed further, although many of the objections he raised pertaining
to gharar may not necessarily exist in the modern types of futures
contracts.
18 chapter one
• El-Gārī also compared futures contracts with istiṣnāʿ and concluded

that both types of contracts involve bayʿ al-kāliʾ bi al-kāliʾ.10 But he
considered the view that a istiṣnāʿ or muqāwalah contract should be
approved by Islamic law on the basis of necessity or ḍarūrah (neces-
sity). However, one may ask if istiṣnāʿ is admitted on the basis of
ḍarūrah, why not admit futures and forward contracts on the same
ground?
It is worth noting that El-Gārī’s position on this issue has not changed
much in the nine years since this session was held. Thus, in a seminar
entitled Islamic Financial Services and Products held at the Institute of
Islamic Understanding, Malaysia, August 1998, he reiterated almost the
same thing about futures in his paper entitled “Futures Trading—Islamic
Perspective.” However, he concluded: “Building a model of futures trad-
ing on the basis of a salam contract should not be excluded altogether.”
Unfortunately, he did not go beyond that to explore this possibility.
Returning to our discussion of the Academy position, it should be
noted that El-Gārī’s paper was followed by a discussion session, which
deliberated primarily on the essence of these new types of contracts.
The session ended without resolution regarding futures or options.
The sixth session of the Islamic Fiqh Academy which discussed futures
trading was followed by another session in Bahrain in 1991, jointly
organized by the Fiqh Academy and the Islamic Research and Training
Institute (IRTI) affiliated with the Islamic Development Bank.11 How-
ever, the session in its final communiqué endorsed the resolution issued
by the Fiqh Academy based in Makkah and reproduced its resolution
word for word with regard to forward and futures commodity contracts
and called for further research on the issue of options. Unfortunately,
we have not been able to go through the different papers presented
so as to give an accurate evaluation of the session or perhaps to come
across some personal views. However, from the resolution it is clear
that the participants have reiterated the same arguments and analysis
10
It seems the author based his argument on the majority’s view that istiṣnāʿ should
fulfill the conditions of salam including the payment of the price at the time of the
contract. However this view has been overruled even by the Islamic Fiqh Academy in
its resolution no. 66/3/67, one year after he presented his paper.
11
The session was held under the auspices of the Islamic bank of Bahrain from
25–27 November 1991.
presented in the Makkah-based Academy, and eventually came to the

same conclusion.
Thus, it could be said that the Jeddah session in 1992 represents the
real position of the Academy regarding derivative instruments. Differ-
ent rulings related to stock market trading in general and derivative
instruments trading in particular have been passed in resolution no.
64/1/7.
Regarding the forward contract in commodities markets in particular,
the ruling was that it is an illegal type of contract since both counter-
values are deferred. Nevertheless, it could be modified so as to fulfill
the established conditions of salam. Moreover, it is not permissible to
sell the commodity in the first salam before taking delivery.
As for commodity futures, where the contracting parties could offset
their position through a similar contract, the resolution considers it an
illegal contract as a matter of principle.
Concerning the foreign currency exchange, similar rulings have been
issued. Namely, spot foreign exchange is permissible if it fulfills the
conditions of the classical ṣarf contract, while the forward and futures
foreign exchange are declared to be illegal. Concerning the trade on
stock indices, the resolution described it as pure gambling.
On the other hand, the Academy recognized the role of brokers
(samāsirah) in the stock market and considered the role as part of a
lawful public interest. However, it passed a negative judgment on the
issue of the selling of interest-based loans from the brokers and the
selling of shares not yet possessed by the seller.
In its recommendations the Academy called for the establishment of
an Islamic stock market based on salam, bayʿ al-ṣarf, the promise to sell
in the future, istiṣnāʿ and other types of Islamic alternatives. Last, the
Academy called for detailed studies on the different Islamic alternatives
and their modes of implementation. Perhaps because of this requirement,
the issue was raised once again in 1993. However, the resolution passed
therein confirmed what had been decided in the previous resolution
regarding the issue of futures trading.
Given the fact that resolution no. 64/1/7 is the resolution which con-
cerns us most in our study of futures trading, it is necessary to give a
brief review of the different papers presented and the follow-up discus-
sions to understand the rationale behind the Academy’s resolution.
Six papers were presented on derivatives trading. Five of them were
on options (ikhtiyārāt) and were presented by Mohammad Mukhtār
al-Salāmī, Wahbah al-Zuhailī, Ṣiddīq al-Ḍ arīr, ʿAbd al-Wahhāb abū
20 chapter one
Sulaimān, and ʿAbd al-Satattār abū Ghuddah. The last paper was on
commodity futures, and it was presented by Muhammad Taqī al-Usmānī,
That paper will be reviewed in this section while the papers on options
will be studied in the following section.
In his single paper about commodity futures, Taqī al-Usmānī con-
cluded that the futures contract is a ḥ arām (not permissible) transaction
for the following reasons:
• It does not fulfill the conditions of salam, which requires payment of

the price at the time of the contract.
• Futures contracts are a kind of bayʿ al-kāliʾ bi al-kāliʾ and, therefore,
they are not permissible in Islamic law. However, Sheikh Taqi did not
discuss the weakesss of the hadith.
• Generally, no delivery is possible in these contracts and the commod-
ity is sold again and again prior to taking possession, which is not
permitted in salam”12 despite the difference of opinion on the issue.
The discussions of commodity futures fared somewhat better in elucidat-

ing the different issues related to commodity futures and opposing and
clarifying some of Sheikh Taqī al-Usmānī’s generalizations. Nevertheless,
to allocate just one brief paper to such an important issue, which has a
major effect on the Muslim economy, falls short of expectations, espe-
cially from a highly respected institution. Furthermore, despite the fact
that some of the participants defended the public interest or maṣlaḥ ah
behind commodity futures, this stand was not reflected in the Acad-
emy’s resolution. I do not propose to discuss everything in this review,
but just show how the Academy’s resolution had been made on very
simplistic grounds. Many issues, which were to be discussed, were left
out. Moreover, if all necessary conditions were taken into account, and
another session were held on this subject, before reaching any resolu-
tion (as one of the participants—ʿAbd al-Salām al-ʿAbādī—suggested
during the discussion on options), one could have expected some dif-
ferent resolutions.
What is needed from the Academy, as a respected academic forum,
is to address the controversial issues on the subject. For instance, they
need to examine the authenticity of the different rulings formulated by
12
Taqī al-Usmānī, “Uqūd al-Mustaqbaliyyāt fi al-Silaaʿ,” Majallat Majmaʾ al-Fiqh
al-Isālmi, 1992, no. 7, vol. 7, p. 275.
some classical scholars based on the weak ḥ adīth about bayʿ al-kāliʾ bi
al-kāliʾ and the alleged ijmāʿ (consensus13 on the subject, although some
scholars have already disputed its authenticity. The Academy would have
done a great service if it had ascertained the ʿillah (effective cause, ratio
legis) behind the prohibition of sale prior to taking of possession; the
ʿillah (effective cause, ratio legis) behind the ḥ adīth “do not sell what is
not with you” whether the application of these principles would differ
in an organized market like that of futures and compared to ordinary
market; the sale of “right” and the reasons why some schools allowed it
while others prohibited it? And why did the latter-days Ḥ anafī scholars
change the fatwā of the madhhab about the sale of “right” when they
were confronted by the change of custom? If these issues and other
important subjects related to the legality of futures and options had
been systematically discussed, one might have expected a different
resolution from the Academy. Unfortunately, nothing of that nature
actually happened.
Another institution which addressed the issue of futures trading is
the Permanent Research Committee of the Board of Great Scholars in
Saudi Arabia in its study entitled “Min Ṣouwar al-Burṣah” (Forms of
Stock Markets), divided into three lengthy articles in Majallat al-Buḥ ūth
al-Islāmiyyah.14 The study quoted many verses and aḥ ādīth (saying of
the Prophet) related to ribā with their commentary from the traditional
works, including Tafsīr al-Qurʾān al-ʿAzīm of Ibn Kathīr; Aḥ kām al-
Qurʾān of Ibn al-ʿArabī; Fatḥ al-Bārī of Ibn Ḥ ajar; and Nayl al-Awṭār
of al Shawkānī. In addition, parts of some familiar fiqhī books, such as
Bidāyat al-Mujtahid of Ibn Rushd and al-Mughnī of Ibn Qudāmah, were
reproduced. The committee also reproduced the descriptive research
on futures trading submitted by the director of the Saudi Monetary
Agency with brief commentaries in the footnotes. In the last part of
the study, the committee reproduced the works of some contemporary
Muslim jurists, which seem to legalize parts of the transactions in
futures contracts. Thus, they quoted a fatwā from Rashīd Ridā in his
reply to some traders in the futures cotton market, and part of Moham-
mad Yousuf Musā’s book Fiqh al-Kitāb wa al-Sunnah fi al-Muʿāmalāt
13
Regarding the weakness of the ḥ adīth and the debate on the ijmāʿ, see chapter 6 of
the present study on the sale prior to taking possession and the sale of debt for debt.
14
General Secretariat of the Great ʿUlama’s Board, Majallat al-Buḥ ūth al-Islāmiyyah,
Riyadh, Saudi Arabia, 1996, no. 46, pp. 26–140; no. 47, pp. 23–120; no. 48, pp. 27–90.
22 chapter one
al-Maṣrifiyyah, followed by some commentaries in the footnotes to

refute their argument.
What we want to stress here is that despite its respectable standing as
an influential institution, the Board’s study lacks reasonable analysis. It
has tried to apply just the interpretations of Muslim jurists in the past
centuries to contemporary problems. Yet, while the sharīʿah is sacred
and unchangeable, the fiqhī interpretations can change according to time
and place and according to maṣlaḥ ah. Moreover, passing a prohibitive
judgment is in no way going to solve the problem. In contrast, it may
raise doubts among some people about the ability of sharī ʿah to respond
to contemporary problems. Yet, such a prohibitive judgment without
proposing a viable alternative did not and will not change anything in
business practice; the oil and other basic commodities from the Muslim
countries will continue to be traded according to supposedly forbidden
contracts without any Islamic input. Finally, if such simplistic attitudes
on the part of those who are learned people in Islamic law have not
changed, the possibility of freeing Muslims from ḥ arām transactions
looks very remote. Yet, the existence of some Islamic financial institu-
tions here and there with deposits estimated at less than 5 percent15 of
the market share of the Muslim economies is not a real solution.
Individual Studies
As we have mentioned before, besides the institutional discussions,
several individual works also addressed the issue of futures trading and
derivatives. However, two different approaches characterized these stud-
ies. The first approach lays emphasis on the need to purify the conven-
tional types of futures trading contract in order to bring it in line with
Islamic principles. At the same time, it aims at rebutting some of the
criticisms raised by certain Muslim scholars against futures contracts.
The second approach, on the other hand, rejects the western types of
15
The Central Bank of Malaysia in its Annual Report (2000) stated that for the year
2000 the Islamic Banking sector registered a strong performance in tandem with the
continued improvement of the Malaysian economy. The market share of the Islamic
banking system increased to 6.9 percent during the year from 5.5 percent in 1999. (See
Nik Norzrul Thani, Legal Aspects of the Malaysian Financial System, Sweet & Maxwell
Asia, 2001, p. 165.). In the Gulf Cooperation Countries the market share is 5–10 per-
cent (see, Hossein Askari & Zamir Iqbal, “Opportunities in Emerging Islamic Financial
Market,” BNL Quarterly Review, 1995, p. 260.)
derivative contracts and tries to formulate a purely Islamic alternative

based on the existing types of Islamic contracts.
The first study which addressed the issue of derivatives contracts from
an Islamic point of view was Muhammad Akram Khān’s study entitled
“Commodity Exchange and Stock Exchange in Islamic Economy,” pub-
lished in 1988 in the American Journal of Islamic Social Sciences.16 The
author discussed first the general principles of the market’s function-
ing in Islam before addressing the validity of the forward contract. He
maintained that Islamic law provided for situations involving forward
transactions, different contracts such as bayʿ al-salam bayʿ al-istiṣnā,
al-bayʿ al-muʾajjal (deferred sale) and bayʿ al-istijrār [A contract between
a client and a supplier, whereby the supplier agrees to supply a particular
product on an ongoing basis, for example monthly, at an agreed price
and on the basis of an agreed mode of payment] and concluded that
“There is hardly anything objectionable in the basic operation of the
forward market.” However, he admitted that “Individual transactions
may have certain elements which need to be modified in the light of
Islamic law.” Unfortunately, he did not specify these elements or how
the modification would be implemented.
Addressing the legality of futures contracts, Muhammad Akam Khān
maintained that:
• A futures contract involves the sale of a nonexistent commodity and

does not involve physical delivery; therefore, it is unlawful.
• Moreover, according to Akram Khān, speculators are the winners,
small investors hardly ever win, brokers carry out dual trading by
conducting business to their account first, which regulation fails to
eradicate, and manipulation persists despite all the safeguards under-
taken so far.
However, Sayyid Abdul Jabbār Shahhabudīn, the chief executive of the

Kuala Lumpur Commodity Exchange, dismissed these shortcomings,
contending that there are adequate safeguards to protect users of the
market, such as the time-stamping of orders, the prohibitions of trad-
ing ahead or against clients’ orders, the segregation of clients’ accounts,
16
Muhammad Akram Khān, “Commodity Exchange and Stock Exchange in Islamic
Economy,” American Journal of Islamic Social Sciences, vol. 5, Issue no. 1, 1988, pp.
92–114.
24 chapter one
reportable position and position limit, etc. Moreover, there is a free

flow of information into and out of the market on a real time basis
around the world.17
Addressing the issue of currency exchange, Akram Khān concluded
that the conventional spot currency exchange, which allows a two-day
lag, cannot be accepted in an Islamic framework and the alternative
could be that the exchange is effected simultaneously by involving cor-
respondent banks or agents at the same time. Regarding the forward
currency exchange, he concluded that it is illegal in Islam. Moreover,
he added that “At best the two banks ‘agree’ or ‘promise’ to transact an
exchange business at a future date. Such an agreement is only morally
enforceable and no court in an Islamic state would enforce it.”
However, the categorical rejection of the possibility of enforcing
such a promise18 may not be justified. This is true because of the deci-
sion of the Islamic Fiqh Academy endorsing such an “agreement” as
enforceable in the sale of murābaḥ ah, and the extension of this rule
by some scholars to currency exchange. Moreover, the Accounting
and Auditing Organization of Islamic Financial Institutions (AAOIFI)
in its standard on currency has clearly endorsed the permissibility of
such transaction.
The author ruled out any possibility of swap and futures currency
exchange in the Islamic economy while admitting that the need for
Islamic financial institutions to deal in forward and futures transactions
arises, partly, from the desire to invest their surplus funds over short
periods of time. Regarding options trading, he compared it with bayʿ
al-salam and bayʿ al-khiyār (sale with option) and concluded that it did
not fulfilll the conditions of either of the two contracts and, therefore,
options trading is unlawful.
The most extensive and in-depth analysis of futures trading so far is
Mohammad Hāshim Kamālī’s work entitled Islamic Commercial Law: An
Analysis of Futures and Options. The study addressed the major points on
futures and options from the Islamic point of view. It also represents the
17
Sayyid Abdul Jabbār Shahhābudin, “Comments on Muhammad Akram Khān’s
Commodity Exchange and Stock Exchange in an Islamic Economy,” Journal of Islamic
Economics, International Islamic University Malaysia, vol. 1, issue 2, July 1988, pp.
71–76.
18
For a detailed discussion regarding the issue, see chapter 4 of the present study.
major work in the first approach to adopting futures contracts in Islamic

law. This approach, as we have mentioned before, is mainly concerned
with the elimination of the un-Islamic elements in futures trading and
with refuting some of the criticisms against futures trading.
The author reviewed the major literature available on the subject and
the opinion of different scholars either in favor of or against futures
and option trading. But the important study missing is that of the
Jeddah-based Islamic Fiqh Academy. Thus, Kamālī rebutted for instance
ʿUmar Charpa’s criticism of short selling; he rebutted Akram Khān’s
interpretation of the ḥ adīth injunction, “Sell not what is not with you;”
and he rejected Aḥmad Yusuf Sulaimān’s interpretation of some fiqh
rulings, such as the sale of the nonexistent, and the resolution of the
Islamic fiqh Academy based in Makkah. Then, he gave a brief history
of futures trading.
It should be noted that despite the fact that the author traced back
the origin of futures trading to the forward contract and touched upon
the differences between the two types of contracts, he did not address
separately the legality of the conventional forward contract from an
Islamic perspective. Yet, it could be said that establishing the legality
of futures contracts implies that the legality of forward contract is also
established. However, it is likely that a separate discussion will have its
own merit. Some Muslim investors may be convinced of the legality of
the forward contract and remain reluctant about futures. This is partly
due to the rejection of futures contracts by some influential Islamic
institutions and, on the other hand, due to its recent introduction in
the financial market.
Moreover, salam and istiṣnāʿ contracts, which have some similarities
with the modern forward contract, also have some differences and,
therefore, could not be considered as the absolute alternative to the
conventional forward contract, although they fulfill some of its objec-
tives. Furthermore, the majority of Muslim jurists are still reluctant to
accept the modern forward contract and insist that it should fulfill the
conditions of salam. In addition, if the futures market is still at its early
stages in the Muslim world, it may take time to be widely implemented;
the forward contract is already in use in every Muslim country despite
the negative judgment about its validity given by the majority of con-
temporary Muslim jurists. Nevertheless, it is a necessary economic tool
that would be applied regardless of the juristic position. Perhaps for
this reason, some have even considered it as a pressing need (mimmā
26 chapter one
taʿummu bihī al-balwā or a general need).19 What we are trying to say

is that a few pages about forward contracts would have added to the
merit of Kamālī’s study.
Kamālī then discussed the benefits of the futures contract and its
validity on the basis of maṣlaḥ ah or public interest. Further, he outlined
the differences between futures contracts and the classical types of con-
tracts. He described in detail the market procedures and technicalities
of trading in futures and options and the main players, such as the
clearinghouse, the hedgers, and speculators. However, considering the
magnitude of the study, the Islamic analysis of the issue of speculation
and hedging in particular is insufficient to address all relevant issues.
What concerns us more here is the fiqhī discourse on futures trading.
Kamālī then proceeded to discuss some of the immediate issues
about futures trading, such as uncertainty and risk ( gharar); he exam-
ined the jurists’ analysis about the existence of the subject matter in a
sale contract; he further mentioned the sale of unseen (bayʿ al-ghāʿib)
commodities and the different interpretations of the ḥ adīth, “Sell not
what is not with you.” The analysis of these issues has been thoroughly
dealt with, and the present study will only add more evidence from
the classical sources of Islamic law to strengthen the argument already
advanced. However, other issues discussed by Kamālī in this connec-
tion, which seem to be in need of elaboration, are the issues of sale
prior to taking possession, debt trading, or bayʿ al-dāyn bi al-dāyn,
and speculation.
Having analyzed the different principles related to futures contracts
and having refuted some contending opinions, especially those of Yusuf
Sulaimān,20 and the resolution of the Makkah-based Fiqh Academy and
ʿAbd al-Bāsit Mutwalī’s fatwā,21 Kamālī gave his approval to the main
legal features of futures contracts. His discussion of the ḥ adīth, “Do not
sell what is not with you,” led to the conclusion that it applies only to
sales involving specific objects and not to fungible goods. Moreover,
19
See the Islamic Fiqh Academy guideline for research papers to be submitted as part
of the forthcoming Encyclopedia of fiqh related to economic issues Majallat Majmaʾ
al-Fiqh al-Isālmī, no. 9, vol. 4, p. 766.
20
Yusouf Sulaimān, “Raiʾ al-Tashrīʿ al-Islāmī fi Masāʾil Burṣa h”, al-Mawsūʿaʾh
al-ʿIlmiyyah wa al-ʾAmaliyyah li al-Bunūk al-Islāmiyyah, Cairo, International Associa-
tion of Islamic Bank, vol. 5, pp. 428–443.
21
Bayt al-Tamwīl al-Kuwaiti, Al-Fatāwā al-Sharʿiyyah fi al-Masāʾil al-Iqtiṣādiyyah,
Kuwait, 1988, p. 528.
the ḥ adīth is mainly concerned with the prevention of gharar and

“since delivery is always guaranteed by the clearinghouse procedures,
the seller’s ability to deliver is not a matter of concern in futures trad-
ing.” Regarding bayʿ al-kāliʾ bi al-kāliʾ, he concluded that there is no
definitive statement in the sunnah of its prohibition, the Qurʾān’s ʾāyat
al-Mudāyanah validated deferred sales, and the manifest texts seem to
accommodate an affirmative ruling on futures trading.
He sustained his conclusion by discussing the opinion of some con-
temporary Muslim jurists, who expressed a positive judgment on some
aspects of futures trading, such as Ali ʿAbd al-Qādir22 in his comment
on Sulaymān’s article; ʿAbd al-Karīm al-Khatīb in his book al-Siyāsah
al-Māliyyah;23 al-Jundī in his book, Muʿāmalāt al-Burṣah,24 Aḥ mad
Muḥyī al-Dīn who defended vigorously the forward contract in one of
his books but raised some reservations about it in his later book,25 and
Majd al-Dīn ʿAzzām in his reply to ʿAbd al-Bāsit’s fatwā.26
We would like to make a brief comment here regarding Majd al-Dīn
ʿAzzām’s methodology that is not addressed by Kamālī’s work. Although
Majd al-Dīn’s conclusion is correct, part of his methodology might not
be acceptable. He maintained that the norm concerning mu’amalāt or
Islamic commercial transactions is permissibility, which means that
contracts are generally permissible unless they are clearly prohibited by
the texts (nuṣūṣ). This prohibition could be either definitive (qaṭiʿ), which
leaves no room for doubt, or speculative (zannī), such as the prohibition
conveyed in a solitary ḥ adīth (ahād). ʿAzzām added that we fully accept
and rely on the first part of this principle, but concerning its second
part, he asserted that the prohibitive evidence pertaining to civil and
commercial transactions must not be anything less than decisive. This
is because the fundamental permissibility of such transactions is based
22
Al-Mawsūʿah ʿal-ʿIlmiyyah wa al-ʾAmaliyyah li al-Bunūk al-Islāmiyyah, Cairo,
International Association of Islamic Banks, vol. 5, pp. 444–451.
23
ʿAbd al-Karīm al-Khatīb, al-Siyāsah al-Māliyyah fi al-Islām wa Ṣilatuhā bi
al-Muʿamalāt al- Muʿāṣirah, Dār al-Fikr al-ʿArabī, Cairo, 1976.
24
Al-Jundī, Mohammad Shahhāt, Muʿamalāt al-Burṣah fi al-Sharīʿah al-Islāmiyyah,
Dār al-Nahdah al-ʿArabiyyah, Cairo, 1988.
25
Aḥmad Ḥ assan Muhyi al-Dīn, ʿAmal Sharikāt al-Istithsmār al-Islāmiyyah fi al-Sūq
al-ʿĀlamiyyah, Bank al-Barakah al-Islāmī li al-Istithmār, Bahrain, 1986, and Aswāq
al-Awrāq al-Māliyyah wa ʾĀthāruhā al, ʾInmāʾiyyah fi al-Iqtiṣad al-Isālmī, Dallah al-
Barakah, Jeddah, 1996.
26
Bayt al-Tamwīl al-Kuwaitī, Al-Fatāwā al-Sharʿiyyah fi al-Masāʾil al-Iqtiṣādiyyah,
p. 590.
28 chapter one
on decisive evidence, that is, the principle of ibāḥah, and this should
prevail unless there is decisive evidence to warrant the opposite.27
It is worth noting, however, that rejecting any prohibition based on
a solitary ḥadīth (āḥād ) is a dangerous precedent which may lead to
the rejection of the sunnah. Yet, there are some differences of opinion
about the acceptance of a solitary ḥadīth in the area of ʿaqīdah (belief and
creed) but not in muʿāmalāt (commercial transaction). Thus, it seems
that by adopting such a methodology Majd al-Dīn undermined some
of the credibility of his argument, although it is basically correct.
Another scholar who addressed the legality of futures trading in
Islamic law is Fahīm Khān in his book Islamic Futures and their Markets.28
However, unlike Kamālī, he limited himself just to futures contracts. The
study represents another approach in tackling the issue of futures mar-
kets from an Islamic perspective. Departing from the previous approach
adopted by some scholars, where the main focus was to identify the
non-Islamic elements in the futures market for modern commodities,
and to look for the Islamic alternative, Fahīm Khān preferred to choose
bayʾ al-salam [a sale or purchase of a deferred commodity for the pres-
ent price] as the basis for any Islamic futures market. Yet, he discussed
briefly istiṣnāʿ and juʿālah [(A party pays another a specified amount
of money as a fee for rendering a specific service in accordance to the
terms of the contract stipulated between the two parties.)] as possible
classical contracts with features of futures trading as well. He stressed
that “we are not looking forward to ‘Islamizing’ an intrinsically non-
Islamic activity, but instead we are trying to revert to our own traditions
to develop similar institutions that would not only bring the parallel
economic benefits to the society that they are meant to provide but that
will also be in line with Islamic legal framework.”29
However, it seems that such a methodology has little merit by itself
since “wisdom is the lost property of a Muslim who is its rightful owner
wherever he gets it.” The author submitted to the fact that even in his
approach to an Islamic futures market, the major structures of the
conventional futures market were still needed. Thus, there is a need for
establishing an exchange as a central place where buyers and sellers meet
27
See Bayt al-Tamwīl al-Kuwaitī, al-Fatāwā al-Sharʿiyyah fi al-Masāʾil al-ʾIqtiṣādiyyah,
al-Kuwait, 1985, pp. 527–545.
28
Fahīm Khān, Islamic Futures and their Markets with Special Reference to Their Role
in Rural Financial Market, Islamic Research and Training Institute, Islamic Development
Bank, Jeddah, Saudi Arabia, 1995.
29
Ibid.
to undertake transactions. There is also a need for a statutory agency to

regulate and monitor the futures market and a clearinghouse in order
to facilitate and regulate the enforcement and settlement of contracts or
the principle of standardization of the futures market. Yet, Fahīm raised
some points of difference between the conventional procedure of the
clearinghouse and that of an Islamic one stressing that “the clearinghouse
of an Islamic Futures exchange will not serve as another party in any
futures contracts. It will serve only as a guarantor that all contracts are
honored.” However, he acknowledged that there might be some problems
in such a mechanism. He concluded, the “clearinghouse in this model
will no more be involved in such silly and irrational activities as selling
to or buying from itself.”
Nevertheless, there seems to be nothing in Islamic law which pro-
hibits a person from being an agent for the buyer and the seller at the
same time if he is acting in good faith. Moreover, the agent would be
responsible for any liability if the contractual agreement stipulates so.
Addressing the scope of futures trading in an Islamic framework,
Fahīm Khān concluded rightly, concerning stock indices, that it is noth-
ing but pure gambling in word and spirit that is played in the market
place. Concerning a foreign currency exchange, he acknowledged the
need for an Islamic concept of foreign currency futures although he did
not elaborate on the subject.
The author also addressed the problem of speculation. Although he
was critical throughout his discussion, he rightly concluded that deal-
ing in the market does require speculation on price. But we have to
distinguish between two types of speculation, particularly regarding
the futures market. One form of speculation is not related to any real
activity and is meant to be merely a financial or monetary transaction
or nonproductive exchange. This should be disallowed as it falls under
the category of gambling. The other aspect of speculation is the one
that is part of some real activity and helps in shifting risks from the
vulnerable producers, who cannot afford bearing all the risk, to those
who can afford to bear it. Such speculation is desirable and permis-
sible. Similarly, activity that provides liquidity to farmers to improve
production decisions, or enables them to increase the volume of their
production, is also desirable and permissible, even if it involves specula-
tion on futures prices.30
30
Ibid., p. 46.
30 chapter one
Since the solution to the problem of liquidity is one of the major

objectives of a futures market, Fahīm Khān tried to reconcile his sug-
gested salam-based futures market and the problem of liquidity. He
argued that such a market provides liquidity to the producers rather
than to traders and curbs speculation. However, in a salam-based futures
market, as suggested by Khān, advance payment is necessary and as a
consequence even genuine traders may face liquidity problems which
may be a serious hindrance for the development of such a market.
Another problem which may arise as a result of advance payment is the
problem of matching the sellers and buyers of futures contracts. Khān
acknowledged this by saying “this too may not be very conducive in
creating competitive conditions in the Islamic futures market.” To solve
the problem, Khān suggested that these “shortcomings arising out of
liquidity constraints upon traders can be overcome by the introduction
of Islamic banks or of specialized Islamic financial institutions to finance
the futures trading.” However, it seems that such a mechanism would
not be without practical problems, especially when we know that earlier
failures by Islamic banks to practice salam was mainly due to certain
policies adopted by these banks.31
On the other hand, concerning the relation between the futures and
cash market and the effect of hedging, Fahīm Khān argued that “since
the futures market and cash market are independent, a farmer will
hardly be a good player in the futures.” However, this argument seems
to be fundamentally incorrect since it ignores arbitrageurs and arbitrage
activity. Furthermore, any market or instrument that consistently exploits
one party of the transaction will see its trading volume reduced and
will die out naturally. This is because the constantly losing party would
be naturally unwilling to continue using this instrument.
However, Fahīm Khān’s fiqh analysis throughout the discussion
is shallow. For instance, he did not make any effort to ascertain the
possibility of selling the salam countervalues before taking delivery.
Although he raised the difference of opinion among the jurists, he did
not proceed to analyze the different evidence advanced and the ratio
behind the prohibition or legality of such a sale. Moreover, the effect of
such analysis on the development of the futures market is totally absent,
31
See Samī Ḥ ammoud, “Ṣiyagh al-Tamwīl al-Islāmī Mazāyā wa ʿAqabāt kulli Ṣīghah,”
Abḥāth Nadwat Ishām al-Fikr al-Islāmī fi al-Iqtiṣād al-Muʿāṣir, held in Washington from
6–9 September 1988, International Institute of Islamic Thought, 1992, pp. 193–247.
despite the author’s acknowledgement that a prohibitive judgment may

be a hindrance for the development of a secondary market. The same
problem of juristic analysis is obvious in Fahīm’s disregarding of the
Mālikī’s opinion, which allows deferring the payment of salam for three
days; or the opinion of some modern writers that it is necessary to
install such payment in salam in order to solve the liquidity problem
which may face even genuine traders.
Another commentator who addressed the issue of futures trading is
Husein Salmon. His paper is entitled “Speculation in the Stock Market
from the Islamic Perspective.”32 It should be noted that many commen-
tators have considered futures trading invalid because of the problem
of speculation involved. Salmon acknowledged that some degree of
speculation is essential in any financial activity. However, some issues he
raised about speculation may not be easily accepted. He divided specu-
lators into two types: first, there are careful investors who invest their
capital after making a careful assessment. They analyze the strengths
of the company based on reliable fundamental factors, including real
assets and property as well as the performance of the company in the
past. This is what he termed rational speculation.
The second kind of speculators are those who do not conduct any
study or analysis. They study the trend of price movements and market
sentiment, and sometimes they base their decisions to buy on whispered
rumors in the market. The evaluation of the second group may not
be totally accepted due to the fact that rumors and manipulation are
unacceptable in principle in the Islamic stock market, and, therefore,
to invalidate futures trading on this aspect is baseless. On the other
hand, many other commentators, without any legal grounds, have also
advanced the claim that any benefit from price movements or price
fluctuations is not legitimate.33 Salmon suggested that it is necessary
that traders keep their shares for at least six months to one year before
selling them to a third party.
32
Husein Salmon, “The Problem of Speculation in Stock Market from an Islamic
Perspective: Investment as an Alternative,” The First International Conference on Islamic
Management: Management of Economic Development in an Islamic Perspective, Jointly
Organized by the Islamic Development Management Project (IDMP), The School of
Social Sciences, University Sains, Malaysia, and the Islamic Research and Training
Institute affiliated to Islamic Development Bank (IDB), Jeddah, Saudi Arabia, from
8–10 December 1998, pp. 1–50.
33
See chapter 5 of the present study for more elaboration on the issue of speculation.
32 chapter one
It seems that there is nothing in Islamic law which prevents a per-

son from buying and selling without having the intention to make
use of the commodity or to keep it for a long time. The topic will be
investigated later since many commentators rely on it as grounds to
invalidate futures.
Salmon calls for a total exclusion of options contracts because they
bring additional uncertainty and they are not comparable to bayʿ al-
salam. He rejected the possibility of taking a fee for a premium or option
without any discussion. However, it seems that there are no grounds for
comparison between the two contracts. On the other hand, his criticisms
of short-selling and margin sale deserve consideration.
Furthermore, Aḥmad El-Ashkar in his article, “Towards an Islamic
Stock Exchange in a Transitional Stage,” observed that speculation could
hardly be viewed as a game of chance or be equated with gambling. He
pointed out the difference between speculation and najash (to bid
up the price of the item, not with the intention to purchase the item,
but rather to raise the price for the customers intending to deceive the
buyers) to refute the allegations of some scholars. He concluded that
“the Islamic securities Market should not be envisaged as a speculation-
free market. A reasonable degree of speculation would be required, and
indeed needed, if the market is to be active and operative.”34
Frank E. Vogel and Samuel L. Hayes III in their study Islamic Law and
Finance, Religion, Risk, and Return also dealt with the issue of deriva-
tives and futures trading. Concerning the sale of debt, especially that of
bayʿ al-kāliʾ bi al-kāliʾ, they acknowledged that the profound implication
of the prevailing restrictions in this area may be an obstacle for the
development of a futures market. Thus, they maintained that
On such matters Islamic law has many complex rules, all designed to avoid
ribā and gharar. The restrictions these rules impose were less important
in the past, when most contracts were promptly executed on at least one
side. However, in today’s world, futures financial obligations are among
the most important forms of property; indeed, such obligations are the
core of many forms of investment traded in huge volumes in financial
markets. Accordingly, Islamic law restrictions in this general area are very
significant in the development of new instruments, particularly if these
are to be traded on secondary markets.35
34
Aḥmad El-Ashkar, “Towards an Islamic Stock Exchange in a Transitional Stage,”
Islamic Economic Studies, Islamic Development Bank, Jeddah, Saudi Arabia, vol. 3, no. 1,
December 1995, pp. 79–112.
35
Frank E. Vogel and Samuel Hayes, III, Islamic Law and Finance, Religion, Risk,
and Return, Kluwer Law International, The Hague, 1998, p. 114.
However, their discussion regarding the issue is very shallow and almost
followed the conservative approach. We may be able to understand the
reason behind this conservative approach if we examine their method-
ology in this area. For instance, they maintained that
Of course the most direct way to achieve the goal of risk management
would be a bold redirection in fiqh thinking (ijtihād ) drawing on new
interpretations of the revealed sources and of basic principles. This ijtihād
will declare what about risk management is legitimate in Islamic law, and
what is illegitimate. But . . . it is ordinarily the most conservative, literal
and legalistic approach that are followed in Islamic finance and accord-
ingly, . . . , we will follow only such an approach. While doing so, however,
we should try not to lose sight of the larger issue just sounded the proper
scope, if any, for risk management in Islamic law.36
At the end of their discussion on the sale of debt for debt, they con-
cluded that the general agreement among the scholars including Ibn
Taymiyyah is against the bilateral executory contract; the force of the
debt for debt maxim in this matter is unlikely to dissipate soon. They
went on to argue that recently two authors have argued for its reversal.
One did it on the ultimate ground of necessity,37 while another offered
more nuanced and challenging arguments. He argued that delayed
payment should be permitted in supply contracts until the goods are
delivered even for fungible goods or goods by description. Pointing
to the more liberal rules that apply to delay in contract with an ʿayn
(tangible property) on the one side, he argued that, first, the central
distinction between ʿayn and dayn (debt) should not rest on whether
the goods are unique, but on whether they already exist. Second, where
goods under a supply contract are continuously available in the market,
the contract should tolerate postponement of paying until the goods are
received, just as they would if the goods were ayn. The Maliki position
requiring payment delay in sales of absent ʿayn should apply to such
modern contracts.38
However, the point which we would like to make here is that to claim
that just two authors have argued for the reversal of the prohibition to
postponing both countervalues is out of touch with reality. Many Muslim
scholars have argued against this maxim, sometimes even before Nazīh
36
Ibid., pp. 154–155.
37
Nazīh Ḥ ammād, Bayʿ al kāliʾ bi al-kāliʾ, Markaz Abhāth al-Iqtiṣād al-Islāmī, Jāmiʿat
al-Malik ʿAbdul Azīz, Jeddah, Saudi Arabia, 1986, pp. 28–29.
38
ʿAbd al-Wahhāb abū Sulaimān, “ ʿAqd al-Tawrīd.” Unpublished paper. In the
forthcoming Mawsūʿat al-Muʿāmalāt al-fiqhiyyah, Islamic Fiqh Academy, OIC Jeddah,
as quoted by Vogel and Hayes, p. 87.
34 chapter one
Ḥ ammmād and Abū Sulaimān, both in Arabic and English works.39

However, a close look at the data adopted in this work, especially in the
area of derivatives and futures trading, reveals that the authors confined
themselves to limited sources of information.
Regarding forward contracts, the study maintains that salam con-
tract is the closest Islamic approximation to the conventional forward
contract.40 With regard to futures contracts, the study concluded that
there is no direct equivalent of futures contracts in Islamic finance. In
addition to the already discussed problem of forward contracts, namely
the postponement of both the price of the goods and the payment,
futures require a daily marking to market, which is also forbidden in
Islam. But the study did not exclude the possibility of a kind of Islamic
futures based on salam.41 Here again some proposals have been made
based on parallel salam whose legality will be ascertained in subsequent
chapters. As in the case of our review of the studies on forward and
futures contracts, the present study will review the institutional studies
in options, followed by the individual studies.
Options Contracts
There are several institutional as well as individual studies addressing

the legality of options contracts in a similar line to that adopted in
forward and futures contracts.
39
See, for instance, Kamālī’s study, “Islamic Commercial Law: An Analysis of
Futures,” American Journal of Islamic and Social Sciences, vol. 13, Summer 1996, no. 2,
pp. 201–203; and it seems that the authors are aware of his opinion on the issue. As
Kamālī mentioned in the acknowledgement of his manuscript, Islamic Commercial Law:
An Analysis of Futures and Options, Research Center International Islamic University,
he was invited by Vogel to deliver a lecture on Futures from the Islamic point of view
at Harvard University. Moreover, many other scholars’ writings in Arabic have argued
against this maxim, such as al-Ḍ arīr in his book al-Gharar wa ʾAtharuhū fi al-ʿUqūd,
Dallah al-Barakah Jeddah, 1995, pp. 329–336; Aḥmad Ḥ assan in his book ʿAmal Sharikāt
al-Istithmār al-Islāmiyyah fi al-Aswāq al-ʿĀlamiyyah, pp. 286–321; Rafīq al-Maṣri, in
his book al-Jamiʾ fi Uṣul al-Ribā, pp. 339–347; and Majd al-Dīn Azzām in his reply to
the fatwā of the Sharīʿah adviser of Kuwait Finance House; see al-Fatāwā al-Shar’iyyah
fi-al-Masāʾil al-Iqtiṣādiyyah pp. 539–545 and ʿIsāwi Aḥmad Isawi, “Bayʿ al-Dayn wa
Naqlihī,” Majallat al-Azhar, Cairo, no. 2, 1956, pp. 168–170.
40
Ibid., p. 223.
41
Ibid., pp. 225–226.
Institutional Studies
As mentioned earlier, the Islamic Fiqh Academy addressed the issue of
derivatives through El-Gārī’s paper in which he performed an analysis
on options. He compared options with khiyār al-sharṭ, salam, and bayʿ
al-ʿarbūn and concluded that:
• There is an apparent difference between khiyār al-sharṭ and options

because options contracts are traded separately from the contract
of the underlying commodity while in khiyār al-sharṭ the option is
part of the contract of the commodity traded. Therefore, in options
there is a combination of two contracts, namely, the premium and
the price of the underlying asset while khiyār al-sharṭ is just a single
contract.
• Options are also different from salam. The option contract is traded
separately from the contract of the underlying commodity, which is
not the case in salam.
• Next, he compared options with bayʿ al-ʿarbūn and concluded that
the paid price in bayʿ al-ʿarbūn is part of the whole price of the com-
modity, while in options it is totally separated.
El-Gārī also makes the assumption of considering an options contract

as a combination of a promise that is followed by a contract. But he
raised the legality of selling a promise and gave a negative answer. Fur-
thermore, he added that options contracts combine two contracts in a
single transaction, which is prohibited in Islam. Finally, he discussed
the legality of selling just a “right,” as it is in the case of a premium in
options, and he concluded that although Islam allows the sale of some
“rights,” the right in options is totally different from those already
approved by Muslim jurists.
El-Gārī concluded that, “despite the fact this transaction has some
characteristics of a sale, it is harmful in most cases and the objective
of the participants in such a market is similar to that of gamblers who
act on the basis of luck and risk. Furthermore, it involves high-risk or
gharar fāḥish and the motive behind it is risk itself.”42
However, El-Gārī’s harsh position regarding options seems to have
changed drastically a few years later. Thus, in his article “Toward an
42
Mohamed Ali El-Gārī, “al-Aswāq al-Mŭliyyah,” Majallat Majma’ al-Fiqh al-Islāmi,
1990, no. 6, vol. 2, pp. 1610–1617.
36 chapter one
Islamic Stock Market,” he rebutted the criticisms raised by some that

options do not serve any economic purpose, but are only a method
of gambling. He pointed out that “the possibility of using this type of
contract for gambling purposes is not ruled out; however, this element
does not accompany the concept of options by necessity.”43 In addition,
he suggested some essential measures to avoid the element of gambling.
El-Gārī has taken a very similar position in his article published as part
of the Encyclopaedia of Islamic Banking and Insurance.44
The issue was discussed again in the seventh Islamic Fiqh Acad-
emy meeting and a resolution was adopted. The resolution stated that
“options contracts as traded nowadays in the international market do
not fall under the purview of any one of the nominated contracts. They
are new types of contracts and since the subject matter in these types
of contract is not māl (wealth), manfaʾah (usufruct), or ḥaq mālī (right
related to property) which could be legally exchanged, then, they are
illegal types of contract and their trading is prohibited.”
The different papers on options presented at the Academy seventh
session followed almost the same line of discussion that they received
from the Academy’s secretariat. Thus, they touched on the definition of
options, their position in the general theory of contracts, their relation
with other types of contracts, especially bayʿ al-ʿarbūn, salam, khiyār
al-sharṭ, sale through description, gift, and the possibility of buying and
selling an absolute “right.” This was followed by two separate discussion
sessions on the two topics.
A close look at the different papers might explain the different rul-
ings in the resolution. For instance, some of the scholars who delivered
papers on the issue passed a prejudgment on options prior to any dis-
cussion or deliberation on the issue. Sheikh al-Salami, for example, said
“from their introduction and objectives, options would not accept any
Islamic modification. Moreover, any modification to make these types
of contracts [come] in[to] compliance with sharīʿah principles could be
considered only if it is possible to implement them. However, options
in their market do not accept any alteration and the Islamic world is
43
Mohamed Ali El-Garī, “Toward an Islamic Stock Market, Islamic Economics
Studies, vol. 1, no. 1, December 1993, Islamic Research and Training Institute, Islamic
Development Bank, Jeddah, Saudi Arabia, pp. 1–20.
44
Institute of Islamic Banking and Insurance, Encyclopaedia of Islamic Banking and
Insurance, London, 1995, pp. 164–173.
not in need of these contracts in its economy.”45 For his part, al-Ḍ arīr
in the first sentence of his study on options said, “This is a new type of
contract and it is an illegal contract. . . .” He concluded, saying “There is
no need to look for alternatives to these transactions from the Islamic
point of view because it does not lead to any significant public interest
which needs to be safeguarded.”46
It is worth noting that a great deal of Islamic law is based on maṣlaḥah
(public interest) and need. However, it seems that the benefits of options,
as tools of risk management, had not been very well explained to these
jurists and scholars by the Muslim economists associated with the
Islamic Fiqh Academy. Accordingly, some of these jurists concluded
that the Muslim economy is not in need of these contracts.
It is clear that this attitude of prejudgment would not be of much
help in reaching a systematic and fair conclusion. Perhaps because of the
misgivings, the participants did not even make the effort to modify these
new types of contract or to look for an Islamic alternative. Moreover,
to think that options have no benefit at all is to deny an internation-
ally recognized reality.47 Still, it is possible to argue that despite their
benefits, options may involve high risk and harm, and, therefore, should
not be allowed in Islamic finance in their present form. But to exclude
them altogether is out of touch with reality. If there were no benefits in
options, one might ask why the issue has been raised from an Islamic
point of view by Muslim economists and financial institutions, such as
the Islamic Development Bank. Moreover, it should be taken into con-
sideration that the major part of the Muslim world economy is based
on commodities such as petroleum, cotton, palm oil, rubber, tin, etc.,
which are traded in futures markets whether in relation to forward,
futures, or options contracts.
Another example of these prohibitive attitudes, which may be behind
the Academy’s resolution, is seen when Sheikh al-Salāmī maintained in
his paper that options are just an expansion of gambling and new ways
to gain money without effort.48 This claim was also made by some other
45
Mohammad Mukhtār al-Salāmī, “al-Ikhtiyārāt,” Majallat Majma’ al-Fiqh al-Isālmī,
1992, no. 7, vol. 1, p. 241.
46
Ṣiddīq al-Ḍ arir, “al-Ikhtiyārāt,” Majallat Majmaʿ al-Fiqh al-Isālmī, 1992, no. 7,
vol. 1, p. 271.
47
See chapter 10 on the economic benefits of options.
48
Mohammad Mukhtār al-Salāmī, “al-Ikhtiyārāt,” Majallat Majma’ al-Fiqh al-Islāmī,
1992, no. 7, vol. 1, p. 235.
38 chapter one
discussants. However, when Sheikh ʿAli al-Taskhīrī warned against label-

ling these contracts as gambling contracts without a strong basis, Sheikh
al-Salāmī revised his initial position, saying “Yes, sometimes they may
involve gambling but sometimes they are a kind of buying and selling
with the intention of hedging against the risk of price fluctuation,”49
and he cited an example of a farmer.
Individual Studies
Among those who addressed the legality of options is Kamālī. He
reviewed some of the existing literature on options, addressing its short-
comings, especially that of ʿAbd al-Wahhāb Abū Sulaimān, “al-Ikhtiyārat:
Dirāsah Fiqhiyyah Taḥ līliyyah Muqārānā in “Majallat al-Buḥūth al-
Fiqhiyyah al-Muʿāṣirah,” and that of Aḥ mad Ḥ assan Muḥyi al-Dīn,
“ ʿAmal al-Sharikāt al-Istithmār al-Islāmiyyah Fi al-Sūq al-ʿĀlamiyyah.”
He compared options with khiyār al-sharṭ and bayʿ al-ʿarbūn. He also
discussed the issue of whether it is lawful to charge a fee for granting
an option and whether an option could be bought and sold as a valu-
able instrument in its own right. He concluded thus:
This analysis is affirmative not only on the parties’ freedom to insert
stipulations in contracts but also that a monetary compensation or a fee
may be asked by one who grants an option or a privilege to the other. If
the seller is entitled to stipulate for a security deposit or a pawn then it
is a mere extension of the same logic that he may charge the buyer and
impose a fee or compensation in respect of such options and stipulations
that are to the latter’s advantage. When the buyer, for example, stipulates
that he will ratify or revoke the contract within a week or a month, this
may well prove to be costly to the seller and he may therefore charge a fee/
compensation for granting the option. We thus conclude that options may
carry a premium and [there]should be, therefore, no objection to this.50
However, this argument will solve the problem only if we consider the
premium as part of the whole price of the underlying commodity and
that it cannot be traded separately. Still, although Kamālī’s argument
here is similar to that of the Ḥ anbalī school in allowing bayʿal-ʿarbūn,
and it will really fulfill some of the benefits of options, the question
49
Majallat Majma’ al-Fiqh al-Isālmī, 1992, no. 7, vol. 1, pp. 581–584.
50
Mohammad Hāshim Kamālī, Islamic Commercial law: an Analysis of Futures and
Options (unpublished manuscript), Research Center International Islamic University,
Malaysia, pp. 356–357.
that remains is the following: is it permissible to trade such an option

separately from the underlying commodity? This is what Kamālī’s work
did not discuss and the present study proposes to address it in detail.
Moreover, this argument limits such a benefit to the seller, and it may
be asked if it is possible for the buyer to make a similar stipulation.
And only at that stage, could we state that at least the simple types of
options, namely put and call options, could be accommodated in Islamic
law. It should be noted that the classical scholars did not discuss such
things in their works. However, the door is not totally closed. Thus, we
believe that the issue of buying and selling just a “right,” like the one
in options, needs more investigation, especially when we find that it
was the main grounds for the rejection of options by the Islamic Fiqh
Academy and the different workshops jointly held with the Islamic
Development Bank.
On the other hand, despite the fact that Kamālī considers bayʿ
al-ʿarbūn as closely resembling options, especially in respect to options
that relate to the payment of a nonrefundable premium, and in the sense
that both can be used as risk reduction strategies, Kamālī preferred to
accommodate options through khiyār al-sharṭ. He stressed that
Although khiyār and ʿarbūn share the same rationale and can both provide
the necessary juristic support for options trading, they are nevertheless
not identical and each can be utilized for different purposes. I still prefer
to utilize the theory of khiyārāt (Islamic options) as the juridical premise
for validating options. I say this not only because of the unequivocal sup-
port that is found for khiyārāt in the sunnah, but also because the basic
concept of the option of stipulation strikes a closer note with options as
a trading formula and a derivative instrument that is associated with an
underlying contract.51
The present study proposes to utilize bayʿ al-ʿarbūn as the juridical
premise for validating options, while the possibility of accommodating
options through khiyār al sharṭ will also be thoroughly investigated.
This is because, first, bayʿ al-ʿarbūn is khiyār al-sharṭ plus the permis-
sion to buy and sell this option. Second, bayʿ al-ʿarbūn, as pointed
out by Kamālī, closely resembles options, especially in that aspect
of options that relates to the payment of a nonrefundable premium
and in the sense that both can be used as risk-reduction strategies.
Last, despite the fact that the legal foundation of bay ʿal-ʿarbūn in the
51
Ibid., pp. 369–370.
40 chapter one
sunnah is weaker than that of khiyār al-sharṭ, it could be accommodated

under the general theory of freedom of contract. Moreover, it has been
accepted by some Companions, including ʿUmar, the second caliph, and
the Ḥ anbalī School of law. In addition, the Islamic Fiqh Academy has
given its permission in its resolution no. 72(3/8)52 about ʿarbūn, which
eliminates any reluctance about its permissibility and acceptance. But
these arguments will be discussed later at the right place.
In conclusion, Kamālī maintained that “there is nothing inherently
objectionable in granting an option, exercising it over a period of time,
or charging a fee for it, and that options trading (like other varieties
of trade) is permissible, (mubāh) and as such, it is simply an extension
of the basic liberty that the Qurʾān has granted to the individual with
respect to civil transactions and contracts (al-Baqarah 2:275; al-Māʾidah,
5:1). Needless to say, options trading, like all other varieties of commerce,
can be distorted by malpractice and abuse and the likelihood of this
is perhaps widespread in options on futures and, indeed, options over
assets that involve high levels of speculative risk-taking. It is, therefore,
essential that we adopt a vigilant attitude toward refining our safeguards
against malpractice at all levels.53
Another scholar who opted for the permissibility of options under
khiyār al-sharṭ was Aḥ m ad Yussuf Sulaymān in his article “Ra’y
al-Tashrīʿ al-Islāmī fi Masāʾil al-Burṣah.”54 A similar opinion was shared
by Mohammad Obaidullah who discussed khiyār al-sharṭ in different
articles55 and considered it as the Islamic alternative to conventional
options and a tool of risk management. Moreover, in his article “istijrār:
A Product of Islamic Financial Engineering,”56 Obaidullah compared
istijrār with similar products of conventional financial engineering and
made a case for its use.
52
See Majallat Majamāʿ al-Fiqh al-Islāmī, no. 8, vol. 1, p. 641.
53
Mohammad Hāshim Kamālī, Islamic Commercial Law: An Analysis of Futures and
Options, pp. 270–271.
54
Al-Mawsūʿah ʿal-ʿIlmiyyah wa al-ʾAmaliyyah li al-Bunūk al-Islāmiyyah, Cairo,
International Association of Islamic Banks, vol. 5, pp. 4244–457.
55
Mohammed Obaidullah, “Islamic Options-Engineering Risk Management Solu-
tion,” New Horizon, Islamic Institute of Islamic Banks, London, May 1998, pp. 6–9 and
“Financial Engineering with Options,” Islamic Economic Studies, Islamic Development
Bank, Jeddah, Saudi Arabia, vol. 6, no. 1, November 1998, pp. 73–103.
56
Mohammed Obaidullah, “Istijrār: A Product of Islamic Financial Engineering,”
New Horizon, Islamic Institute of Islamic Banks, London, October 1997, pp. 3–8.
On the other hand, Aḥmad Muḥyī al-Dīn in his book, ʿAmal Sharikāt
al-Istithmār al- Islāmiyyah fi al-Sūq al-ʾĀlamiyyah,57 claimed that options
are illegal because they contradict the general principles of Islamic
commercial law. In addition, they do not fall within the purview of
khiyār al-sharṭ or its objectives. Moreover, they contradict the principle
of justice since the option holder will benefit from the loss of the one
who provided them. He added that such options are similar to the
illegal kind of options (al-shurūṭ al fāsidah) that have been rejected by
all schools of law. Finally, these kinds of contract are similar to some
contracts prohibited in Islam such as the combination of two contracts
in a single transaction (bayʿataini fi bayʿatin wāḥidah).
It should be noted that none of these objections is genuine or has a
strong link with the validity of options. However, we will discuss them
at their proper places later. Aḥmad Ḥ assan continued to maintain the
same argument in his book, Aswāq al-Awrāq al-Māliyyah wa ʾAthāruhā
al ʿInmaʾiyyah fi al-Iqtiṣād al-Islāmī. Aḥmad Ḥ assan was also very critical
of speculation, but acknowledged the need for market players who are
looking for price differentials to ensure liquidity in the market.58
On the other hand, Obiyathullah’s paper entitled “Derivative Instru-
ments and Islamic Finance: Thoughts for Reconsideration” addressed
the issue of derivative instruments, their evolution, their benefits, and
makes a case as to why they are needed. In addition, he discussed
salam and istijrār as Islamic financial instruments with features of
derivative instruments. He limited the scope of his article, saying “The
objective of this paper is not to reevaluate these instruments in the
light of the Sharīʾah, nor is it intended as a critical examination of
the juridical works of fuqahāʾ (Sharīʿah scholars). What is intended
here is to provide a deeper understanding and an appreciation of these
instruments: how they evolved, why they are needed, their diversity of
57
al-Awrāq al-Māliyyah wa ʾAthāruhā al, ’Inmāʾiyyah fi al-Iqtiṣad al-Isālmī, Dallah al-
58
al-Awrāq al-Māliyyah wa ʾAthāruhā al, ʾInmāʾiyyah fi al-Iqtiṣad al-Isālmī, Dallah al-
42 chapter one
use, and the serious handicap that could be posed to Islamic businesses
from ignoring them.”59
Vogel’s and Hays’ study explored the possibility of options through
khiyār al-sharṭ and bayʿ al-ʿarbūn. It concluded that khiyār al-sharṭ or
the stipulation of an option has little apparent significance for the cre-
ation of Islamically valid derivatives, since the party giving the option
cannot be compensated for doing so; thus, the option right itself is not
paid for. Its significance is rather a vital analogy, and a background set
of rules and principles for ʿarbūn.60 Regarding ʿarbūn itself, the study
concluded that of all Islamic contracts, ʿarbūn offers the closest analogy
to options. However, they acknowledged that classical law gives little
hope for the approval of the option contract. Rather, it poses a series
of objections, of which the following are the most important.
• An option requires payment for something that is an intangible “right,”

not property (māl ) in the usual sense (i.e., tangible goods or a utility
taken from a tangible good), for which compensation alone can be
demanded. This is one basis for the objection of some scholars that
the option price is “unearned.” It is also the position taken by the
OIC Academy in declaring the illegality of an option contract.
• An option arguably involves gambling. In practice, only one party can
gain from the contract, while the other must lose. Whether a party
will gain or lose depends on the unknown futures market price. In
most actual option contracts, moreover, the parties have no intention
of taking delivery, but only of liquidating their contracts against the
price differentials. In every lawful Islamic sale, on the other hand,
the parties fix their exchange fully at the time of the conclusion of
the contract, and at least one if not all the countervalues are presently
owed, even if not immediately paid for.
• An option incorporates the idea of a future sale, which is itself impos-
sible under classical law.
• If the option is in currency, not even forward sales are allowed since
currencies may be exchanged only at the spot.
59
Obiyathulla Ismath Bacha, “Derivative Instruments and Islamic Finance: Some
Thoughts for a Reconsideration”, Unpublished Paper, International Islamic University,
Malaysia, November, 1997, p. 7.
60
Frank E. Vogel and Samuel Hayes, III, Islamic Law and Finance Religion, Risk,
and Return, p. 156.
• The price of an option compensates for lost opportunity. Opportunity

costs are by definition conjectural, involving sales that do not occur.
Damages in Islamic law do not include conjectural losses.
• Options may involve selling what one does not own.
For all these reasons, unless justifiable as ʿarbūn or by analogy with

ʿarbūn, the option contract in conventional form is unlikely to be
accepted.61 It should be noted that these objections are mostly those
pointed out by the participants in the Islamic Fiqh Academy session
on options. However, neither Vogel and Hayes’s study nor that of the
Islamic Fiqh Academy went beyond that by discussing the genuine
grounds of these objections in Islamic law. Nonetheless, we do believe
that many of these objections, if not all of them, could be reversed if a
thorough investigation is made.
It should be noted, however, that Vogel and Hayes’s study provides
some good suggestions as to how to develop Islamic options, the legal
grounds of which will be discussed in the relevant chapter.
61
Ibid., pp. 264–5.
CHAPTER TWO
THE FORWARD COMMODITIES MARKET
A forward contract is an agreement to exchange assets in the future

at a predetermined price. It plays a vital role in the Western financial
markets and serves as the basic building block for more advanced and
sophisticated financial instruments. The primary function of the for-
ward market is to provide a vehicle to hedge against unexpected and
undesirable price fluctuations. The forward market directly affects the
spot market as it also offers arbitrage and speculation opportunities.
Forward markets also serve the purpose of “price discovery”—the
process of determining the equilibrium prices that reflect current and
positive demands for current and prospective supplies, and making
these prices visible to all.1
The forward contracts in commodities are the simplest type of deriva-
tives. In such a contract the parties could be a producer who promises
to supply the product and a consumer who needs the product. Forward
contracts are common in merchandise or commodities trading. Without
them, business trade and planning would be greatly hindered. If a small
baking company could not order flour in advance for its immediate
needs, for example, it would have to buy a large quantity at a prevailing
price and store it for future use. There would be uncertainty about what
the price would be when the next order is placed. The miller will have
a more difficult task in planning how much flour to produce without
orders in hand, and shortages would be more likely to occur.2
To see how a typical forward contract works, let us examine a simple
example of a cocoa farmer (producer) and a confectioner who needs
cocoa for his product (consumer). To simplify matters, let us say the
farmer has planted cocoa and expects to harvest 120 tons of cocoa
in six months. The confectioner, on the other hand, has cocoa in his
1
Philippe Jorion and Marcos De Silva, The Importance of Derivatives Securities Mar-
kets to Modern Finance, Catalyst Institute (Chicago: Catalyst Institute), p. 222.
2
Anthony F. Herbst, Commodity Futures Markets, Methods of Analysis, and Manage-
ment of Risk, John Wiley and Sons, United States, 1986, p. 3.
the forward commodities market 45
inventory to last him for the next six months but will need to replen-
ish his inventory in six months with 120 tons. Though simplified, this
is a very common business situation. We have a producer who will
have product available at a future date and a consumer who will need
the product in the future. Clearly, both parties face risk, essentially
price risk. While the farmer will be fearful of a fall in the spot price
of cocoa between now and six months from now, the confectioner will
be susceptible to an increase in the spot price. Thus, both parties face
risk, but in the opposite direction. It would be logical for both par-
ties to meet, negotiate, and agree on a price at which the transaction
can be carried out in six months. Once the terms are formalized and
documented, we have a forward contract accruing to both parties. Both
parties, because of the forward contract, have eliminated all price risk.
The farmer now knows the price he will receive for his cocoa regardless
of what happens to cocoa prices over the six months. The confectioner
too has eliminated price risk since he will only have to pay the agreed
upon price, regardless of spot prices in the next six months. There is a
second benefit to this. Since both parties have “locked-in” their price/
cost, they would be in a much better position to plan their business
activities. For example, the confectioner can confidently quote to his
customers the price at which he delivers them products in the future.
This would not have been possible if he were uncertain about his input
price. The benefits of a forward contract, therefore, are often more than
merely hedging price risk.3
Economic Benefits of the Forward Contract
Some sharīʿah scholars have argued in favor of this contract. ʿAbd

al-Wahāb Abū Sulaimān, for instance, said “The need for this contract
is not a need confined to a specific nation, it is a need for all nations
around the globe whatever their status of civilization, developed or
developing. The principle in Islamic law is that the general need could
be considered as necessity (al-ḥ ājah idhā ʿammat kānat ka al-ḍarūrah).”4
3
See Obiyathulla Ismath Bacha, “Derivative Instruments and Islamic Finance: Some
Thoughts for a Reconsideration,” p. 3.
4
ʿAbd al-Wahhāb Abū Sulaimān ʿAqd al-Tawrīd Dirāsh Fiqhiyyah Taḥlilīyyah” paper
presented to the twelfth session of the Islamic Fiqh Academy, Rabat, Morocco, p. 7.
46 chapter two
Similarly, Ḥ asan al-Jawāhirī maintained that the forward contract used

by companies and governments to secure the supply and export of goods
becomes a necessity of modern transactions.5
Sheikh Mukhtār al-Salāmī also comes out very strongly in favor of this
contract after giving some examples regarding its application, and argu-
ing that the need for it is the result of the technological advancements
in this world and that the Islamic world has no other alternative but to
follow. It is the necessity of modern civilization which has shortened
distances between places and made it necessary for any nation which
wants to survive to follow suit. If we are going to make it compulsory
for companies and industries to advance the payment of every transac-
tion they want to conclude, as it is in the salam contract, we are forcing
them not to produce and if we are making it compulsory for them not
to sell what they have not manufactured yet, we are leading them to
bankruptcy. Moreover, rejecting this contract will create hardship and
ḥ araj (difficulty and hardship) to Muslims while what is important is
to protect the maṣlaḥ ah (public interest) of the ummah (community)
and its property.6
It should be noted here that despite his positive and strong analysis
of different principles related to futures trading, Ibn Taymiyyah opposed
the deferment of both countervalues (assets) in a contract or the for-
ward contract. According to him, such a contract has no benefit and
the dhimmah (liability, responsibility) of the two parties will be made
liable for nothing. The objective of the contract, Ibn Taymiyyah argues,
is to make delivery and since there is no delivery in this contract, the
ultimate objective of the contract is not fulfillled.7 Ibn Qayyim followed
the argument of his teacher, and reached the same conclusion.8 Refuting
this argument, Sheikh al-Ḍ arīr said:
The claim that there is no benefit in such a contract is unacceptable. The
buyer will own the subject matter of the contract and the seller will own
the price and the deferment of taking possession will not render the con-
tract without benefit. Moreover, a sane or rational person will not enter
5
Ḥ asan al-Jawāhirī, “Uqūd al-Tawrīd wa al-Munāqaṣāt” paper presented at the
twelfth session of the Islamic Fiqh Academy, Rabat, Morocco, p. 3.
6
See Mukhtar al-Salāmī, “Ta’jīl al-Badalayn fi al-‘Uqūd,” paper presented in Nadwāt
al-Barakah al-Tāsia‘h ʿasharah lil iqtiṣād al-Islāmī, Makkah al-Mukarramah, 2–3
December 2000, p. 5.
7
Ibn Taymiyyah, Nazariyyat al-ʿAqd, p. 235.
8
Ibn Qayyim, I’lām al-Muwaqq‘in an Rab al-ʿĀlamīn, vol. 3, p. 9.
into a contract without having interest in it. Therefore, if the two parties
have no real interest in this contract they would not have concluded it
from the beginning.9
Moreover, as Aḥmad Ḥ assan rightly pointed out, it is likely that there
was no benefit for such contracts at the time of Ibn Taimiyyah and Ibn
Qayyim. They rejected this contract only on these grounds10 and not
on any other genuine legal grounds. We have already shown that this
contract does have benefits. Aḥmad Ḥ assan stressed that the global
material development brought about new economic transactions, which
were unknown to early Muslim jurists. Therefore, the trend of judging
such a contract as illegal without any strong legal basis is against the
objectives of the sharīʿah. We do believe that any contract in Islamic law
should fulfill the following conditions to be considered as legal:
1. It should not contradict a genuine naṣ (text).

2. It should not go against the general principles of muʿāmalāt. (Islamic
Commercial law)
3. It should not involve a clear harm.
However, none of these three conditions is present in the forward

contract. Therefore, it is a valid contract.11 However in his book ʾAswāq
al-ʾAwrāq al-Māliyyah, and for fear that the forward contracts may be
used for speculative purposes, Aḥmad Ḥ assan reversed his initial posi-
tion and concluded that it might be considered as an illegal contract.12
Ironically, he allowed such a contract to be used only for import and
export activities. He failed to rebut the strong arguments he advanced in
his previous book for the legality of this contract. Moreover, the argu-
ment that these kinds of contract may be used for speculative purposes
may not be acceptable, especially in the commodity and share markets.
Hence, it could be used for that purpose in the currency, interest rate,
and stock index markets. Then, this possibility should not be applied to
other areas without a strong basis. Moreover, since interest rate futures
9
al-Ḍ arīr, al-Gharar wa Atharuhu fi al-‘Uqūd, p. 316.
10
Aḥmad Ḥ assan Muhyī al-Dīn, ʿAmal Sharikāt al-Istithmār al-Islāmiyyah fi al’Aswāq
al-ʿĀlamiyyah, Bank al-Barakah al-Islāmī li al-Istithmār, Bahrain, 1986, p. 320.
11
Ibid., pp. 320–321.
12
Aḥmad Ḥ assan Muhyi al-Din, ʿAswāq al-ʿAwrāq al-Māliyyah wa Atharuha
al-Inmāʾiyyah fi al-Iqtiṣād al Islāmī, p. 323.
48 chapter two
contracts and stock index futures contracts are excluded from the begin-
ning from the Islamic alternative, there are no grounds for objection.
Isāwī Aḥmad also refuted the claim that there is no benefit in the
forward contract. It is not acceptable because traders and manufactur-
ers always compete in trading their products. Thus, if a manufacturer
would like to guarantee the sale of his product, he will enter into an
agreement with a buyer on the condition that he will receive the price
later when the commodity sold is presented. The trader on his part may
be in need of a specific commodity but he has no money for the time
being. If he has to wait until he gets the money, another trader may take
the commodity in question before him. Therefore, to avoid this risk he
has to enter into the deal with the condition that he will pay the price
at the time he receives the goods. In such a deal both payment for and
delivery of the commodity have been deferred but there is a real interest
involved. Thus, the postponement of both payment and commodity is
lawful except in the case of currency trading. Moreover, we have some
cases in which both countervalues have been deferred but the transac-
tion is still considered valid in Islamic law, such as the case of ijārah
(lease) and juʿālah. In both cases, a person may request another person
to do something for him in exchange for a charge which will be paid
to him after the job has been accomplished. Therefore, the contract in
which both countervalues have been deferred (the forward contract)
is a legal contract if it does not involve ribā (interest) or gharar13 (risk-
taking). Similar objections to Ibn Taimiyyah’s opinion are advanced
by Sheikh Mukhtār al-Salāmī,14 Sheikh Aḥmad ʿAli ʿAbd Allāh,15 and
Sheikh Ḥ asan al-Jawāhirī.16
However, the forward contract as a trading instrument in its actual
form has no exact counterpart in Islamic law. Some scholars have
drawn a similarity between the forward contract and bayʿ al-salam on
the one hand and bayʿ al-istiṣnāʿ on the other. Furthermore, some have
tried to establish the legality of this contract under bayʿ al-ṣifah (sale
by description). Therefore, we have to look into the points of similarity
and difference between salam (contract of future sale) and istiṣnāʿ on
13
Isawi Aḥmad, “Bayʿ al-Dayn wa Naqlihi,” pp. 169–170.
14
See Mukhtār al-Salāmī, “Taʾjīl al-Badalain fi al-ʿUqūd,” paper presented in Nad-
wat al-Barakah al-Tāsiaʿh ʿasharah lil iqtiṣād al-Islāmī, Makkah al-Mukarramah, 2–3
15
Aḥmad ʿAli ʿAbd Allāh, “al-Bayʿ ʿalā al-Ṣifah,” paper presented in Nadwat Bank
al-Shamāl litaʾsīl al-ʿAmal al-Maṣrifī, 20–21 June, 1997, Sudan, p. 4.
16
Ḥ asan al-Jawāhirī, “Uqūd al-Tawrīd wa al-Munāqaṣāt,” p. 5.
one hand, and the modern forward contract on the other. Meanwhile,
if it could be accommodated under the category bayʿ al-ṣifah then what
are the similarities and differences between the two contracts? However,
if we consider the forward contract as a new type of contract, then, we
need to study it within the general principles of Islamic commercial law.
Moreover, we have to look into the authenticity of the arguments posed
against it, such as the claim that it is a kind of bayʿ al-kāliʾ bi al-kāliʾ,
that is, the sale of what one does not possess, the sale of m’adūm (non-
existent), and the claim that there is no benefit in such a contract.
Salam and the Forward Contract

Salam is the closest, among the contracts named in Islamic law, to the
conventional forward contract. Some scholars have considered it as the
Islamic alternative to the forward contract. Thus, Sudin Haron said:
Forward markets do exist in Islamic financial system but only on a limited
scale. Futures markets, however, have not been established in Islamic finan-
cial system. In case of forward markets for money there is a divergence
of opinion pertaining to the legality of such transaction from the point
of view of sharīʿah . . . Forward markets for commodities are allowed by
shariʿah under the principle of bayʿ al-salam (an advance purchase) and
istiṣnāʿ (a contract to manufacture).17
However, it seems that to consider bay’ al-salam as the typical Islamic
alternative to the modern type of forward contract in commodities
would not be totally correct without resolving some controversial
issues. Thus, one of the outstanding issues here is that in bayʿ al-salam
full payment at the time of agreement is a requirement according to
the majority of Muslim jurists, which is not the case in the forward
contract. Therefore, to accommodate the forward contract in Islamic
finance such an issue should be addressed. This study will attempt to
elaborate on the matter. Another issue of concern related to bayʿ al-salam
and the forward contract is the claim made by many scholars that bay’
al-salam is accepted in Islamic law but not in accordance to the norms;
rather, its acceptance is considered to be an exception. Therefore, it is
not possible to make an analogy between salam and any new contract.
17
Sudin Haron and Bala Shanmugan, Islamic Banking System Concept and Applica-
tion, Pelanduk Publications, Kuala Lumpur, 1997, p. 180.
50 chapter two
This issue also needs to be addressed in connection with the legality

of the forward contract.
Zamīr Iqbāl considered bayʿ al-salam to be the closest substitute
for the forward contract. He acknowledged that bayʿ al-salam is not
practiced in the financial market for two reasons: first, compared to
the western forward contract, bayʿ al-salam requires full payment at the
time of agreement. Second, since interest is incorporated in the deter-
mination of the forward contract price, it is synonymous with paying
or receiving interest. The point in question is whether an increase with
deferred delivery is justified or not and, if such an increase is allowed,
does it result in dealing with interest (ribā)? Zamīr Iqbāl concluded
that a forward contract may not incorporate the element of interest as
it is prohibited by Islam.18
However, it should be noted that the issue as to whether an increase
in price with deferred delivery will be synonymous with paying or
receiving interest does not arise in the forward contract at all. Moreover,
several Islamic institutions have ruled for its legality.19
Thus, we may submit that the issues related to salam in connection
to the forward contract which need to be discussed are, first, the issue
of full payment at the time of agreement in salam and, second, the
possibility of drawing an analogy with salam if we consider it in line
with qiyās (analogy) and not against it. Still, some other issues may have
a bearing on our discussion, namely, the relation between salam and
futures trading contracts, such as the possibility of selling the salam-
based goods before actual receipt of the parallel salam. However, these
issues are more closely related to futures contracts than forward con-
tracts; we are concerned here just with forward contracts. It is logical,
nevertheless, to discuss briefly the important features of salam before
proceeding to any comparison.
Definitions and Conditions of Salam

Salam is defined as “a sale or purchase of a deferred commodity for
the present price (bayʿ ʾājilin bi ʿājil ).”20 Another definition is as follows:
18
See Zamīr Iqbāl, “Financial Innovation in Islamic Banking,” Journal of Islamic
Banking and Finance, The International Association of Islamic Banks, Karachi (Asian
Region), vol. 15, no. 2, April–June 1998, pp. 12–13.
19
See Islamic Fiqh Academy’s resolution no. 2, 6th session, 1990.
20
Ibn ʿAbidin, Ḥ āshiyat Rad al-Muḥ tār, al-Bābī al-Ḥ alabī, Cairo, 1966, p. 209.
“A transaction where two parties agree to carry out a sale/purchase

of an underlying asset at a predetermined future date but at a price
determined and fully paid for today.”21 On the other hand, beside the
general conditions of an ordinary sale in Islamic law, salam has its own
conditions. Thus, based on the writing of classical Muslim scholars, and
by the requirements adopted by the Islamic Fiqh Academy (Jeddah) in its
ninth session, a salam contract must fulfill the following conditions:
1. It is necessary to precisely fix a period for the delivery of goods.

2. Quality, quantity, and place of delivery must be clearly enumerated.
3. A salam contract cannot be based on uniquely identified underlying
assets. This means the underlying commodity cannot be based on a
commodity from a particular farm/field.
4. Full payment should be made at the time of making the contract.22
This last condition is not a point entirely agreed upon among the differ-
ent schools of Islamic law and it is this condition which may prevent
salam from playing a parallel role to the modern forward contract in the
commodities market. According to the Ḥ anafīs, Shaf ʿiīs and Ḥ anbalīs
payment of the principal should not be delayed beyond the time the
contact is signed. Their justification for this is that delay of both com-
modity and principal is in fact a sale of debt for debt, which is prohibited
in the sharīʿah.23 Moreover, the principal must be paid in advance if the
very objective of salam is to be fulfilled.24 On the other hand, the Mālikīs
disagree with regard to the permissibility of delaying the price of salam.
Delay of payment according to them is possible as follows:
21
Fahīm Khān, Islamic Futures and Their Market, Research Paper no. 32, Islamic
Research and Training Institute p. 14; also see Obiyathulla Ismath Bacha “Derivative
Instruments and Islamic Finance: Some Thoughts for a Reconsideration,” Unpublished
Paper, International Islamic University Malaysia, November, 1997, p. 18.
22
Ṣiddīq al-Ḍ arīr, “al-Salam wa Tatbīqātuhu al-Muʿāṣirah,” Majallat Majmaʿ al-Fiqh
al-Islāmī, ninth session, 1996, no. 9, vol. 1 p. 379–383; Nazīh Ḥ ammād, “al-Salam wa
taṭbiqātuhu al-Muʿāṣirah,” Majallat Majmaʿ al-Fiqh al-Islāmī, ninth session, 1996, no. 9
vol. 1, pp. 553–555.
23
The notion of prohibition of sale of debt for debt is widely cited as grounds to
invalidate numerous kinds of transactions. However, in reality there is nothing in the
sharīʿah, which prohibits the sale of debt for debt unless it involves ribā or high risk
(gharar). The present study will dedicate a special chapter to investigate and analyze
critically the arguments and opinions concerning the sale of debt for debt.
24
See for instance Ibn al-Humām, Sharḥ Fatḥ al-Qadīr, al-Matba’ah al-Amīriyyah,
Egypt, 1937, vol. 5, p. 337; Al-Nawawī, al-Majmūʿ, vol. 9, p. 208. In Qudāmah, al-Muqhnī,
vol. 4, p. 324; Ibn Ḥ azm, al-Muḥ allā, vol. 9, p. 109.
52 chapter two
It is permissible to delay payment up to three days after the time of sign-

ing the contract, whether this is stipulated in the agreement between the
two parties of the contract or not and whether the price is to be paid
in cash or in kind. If such a delay is made according to what is agreed
upon, payment should not be delayed more than three days. Some Mālikīs
believe that it is permissible to delay payment for more than three days
without prior agreement. On the other hand, if the payment is in kind
some Mālikīs accept delay in this case, if it is for a short period. However,
payment should not be delayed until the time of delivery. Another group
of Mālikīs believes that if such a long delay happens, the salam contract
would still remain valid, but the act of making a long delay is makrūh
(disliked).25
Based on the Mālikīs opinion, al-Ḍ arīr did not see any problem in defer-
ring the price of salam as long as it is for a period not exceeding the
time of delivery of the commodity itself. He argued that the deferment
by itself could not be the cause for gharar or prohibition but all these
arguments are based on the assumption that the approval of salam in
Islamic law was against the norms and not in line with qiyās.26
Furthermore, it should be noted that the Mālikīs allow a similar delay
in the case of land leasing. According to Imām Mālik, it is permissible
to lease on the condition that the lessor receives the leased property
one year after the time of agreement while the second party can pay
the price ten years later.27 This case also shows that deferment of both
countervalues is not prohibited.
It should be noted here that the Ḥ anafīs consider the payment of the
price of salam at the time of contract as a condition for the continu-
ation of the validity of the contract (baqa’uhuʿalā al-siḥ ḥ a) and not
as a condition for its effectiveness (infādhihi) nor its validity (siḥ ḥ a).28
Some Shaf ʿīis, on the other hand, differentiate between the terms used
in concluding the contract. If the contract is concluded as a salam or
salaf (another name of salam), then the price must be paid at the time
of concluding the contract. However, if the contact is concluded using
25
For more details about the Mālikī’s opinion see al-Ḥ attab, Mawāhīb al-Jalīl li-Sharḥ
Mukhtaṣar Khalīl, Mustaphā al-Ḥ alabī, vol. 4, pp. 514–517; al-Khirshi, Sharḥ al-Khirshī
ʿalā Mukhtaṣar Khalīl, Dār Ṣādir, Beirūt, vol. 5, pp. 202–203, and Ibn Rushd, Bidāyat
al- Mujtahid, vol. 2, p. 202.
26
Al-Ḍ arīr, Al-Gharar wa Atharuhu fi al-‘Uqūd, pp. 461–462.
27
Imām Mālik, al-Mudawwanah, vol. 3, p. 370.
28
Ibn ʿĀbidīn, Rad al-Muḥ tārʿalā al-Dur al-Muqhtār, al-Bābī al-Ḥ alabī, Cairo, vol. 4,
p. 288.
the term sale rather than salam or salaf, then it is not necessary that
the price should be paid immediately.29 Despite the weakness of this
differentiation, it does prove that the mere deferment of both counter-
values is not ḥ arām (prohibited). The following table summarizes the
opinion of the major schools on the conditions of salam.
Table No. 1.1 Opinion of Major Schools on the Conditions of Salam

Item Delivery Description Type of Time of
period commodity payment
1. Abu Must be Clearly Not Full payment
Hanifah precisely enumerated uniquely at the
fixed identified conclusion of
underlying the contract
asset
2. Imam Must be Clearly Not Could be
Malik precisely enumerated uniquely deferred to
fixed identified three days or
underlying even more
asset
3. Imam Must be Clearly Not Full payment
Al-Shafie precisely enumerated uniquely at the
asset
4. Imam Must be Clearly Not Full payment
Ahmad precisely enumerated uniquely at the
asset
It can be deduced from the above arguments that these scholars, espe-
cially the Mālikīs, regard the deferment of the price in salam as neither
involving ribā nor gharar, which nullify a contract. Therefore, all these
arguments about the prohibition of the deferment of both countervalues
in a contract are based on the weak ḥ adīth about bayʿ al-kāliʾ bi al-kāliʾ.
One may ask why the Mālikīs, for instance, departed from the “general
principles” and allowed deferment for three days? Some may argue that
29
Al-Shirāzī, al-Muhadhdhab, Maktab al-Bābi al-Halabi, Cairo, 1976, vol. 1, p. 392.
54 chapter two
this is not in essence a departure from the “general principles,” but just
an application of the maxim ma qārab al-shaiʾ yuʾtā ḥ ukmahu, which
means whenever a case is very close to another they could be given
the same rule. Therefore, a deferment of just three days may not be
considered a real deferment. However, if the deferment of the price in
salam can really lead to ribā or gharar, then could it be argued whether
it is possible to allow it for one hour or one day and at best for three
days? The answer is clear. Ribā or gharar cannot be allowed either for
three days or more or less.
We may note here that one of the sources of misconception about
the legality of deferring both countervalues is an opinion reported from
Ibn ʿAbbās in connection with āyat al-Mudāyanāh to the effect that this
verse is concerned with salam and since at this time, salam means the
deferment of one of the countervalues, some scholars tried to confine
the general meaning of the verse to the interpretation of Ibn ʿAbbās
while others have a somewhat more liberal approach.30 After analyz-
ing the different arguments on the issue, Kamālī maintained that the
ʿUlamāʿ (Shariʿah scholars) have held different views with regard to their
interpretation of the word dayn. While some have confined dayn (debt)
to certain types of debt, others have applied it generally to all deferred
liability transactions that can fall within its broad meaning. The Qurʾān
has evidently not specified the general meaning of dayn or tadāyantun
(debt or debt exchange) and there is no compelling evidence to warrant
a departure from this position. The preferred view would thus appear
to be that the general language of the text should convey its general
and unqualified meaning. Even if we admit Ibn ʿAbbās’s interpretation,
it may be said that it was based on the occasion of revelation (sha’n
al-nuzūl ) of the ayah. According to the general rules of uṣūl al-fiqh,
the sha’n al-nuzūl (the occasion of revelation) of a text may be specific
but that does not necessarily restrict the general purport and ruling of
the text.
Kamālī continues his argument concluding that even if the text is
revealed concerning salam, the language of the text is general and
applies to all debts, which would imply the basic legality of deferred
transactions in all its varieties in the sharīʿah, provided, of course, that
30
For more detail, see chapter 6 on the sale of debt for debt.
none of the principles of the Qurʾān and sunnah on such other themes
as usury, gambling, and gharar are violated.31
Another misconception related to salam is the claim that it is allowed
against the qiyās and the norms of Islamic law. This is because it is
the sale of what one does not possess and the sale of the nonexistent.
Therefore, it involves gharar. However, since there is a specific ḥadīth
from the Prophet about its legality it could be deduced that it is allowed
as an exception.32
However, this argument is rebutted by some classical scholars, such as
Ibn Taymiyyah, Ibn Qayyim, and Ibn Ḥ azm as well as some prominent
contemporary Muslim scholars. Before giving the legal arguments it is
appropriate to mention the relevance of salam to our discussion on for-
ward trading. Since salam is the closest contract approved or permitted
by the explicit sunnah of the Prophet, we are in need of extending this
permissibility to the modern type of forward contract by way of qiyās
or analogy. However, such qiyās would be impossible if we consider
the permissibility of salam as an exception and against the norm. For
a valid analogy, according to the commonly agreed principle of Islamic
jurisprudence, the ʾasl or the principle should not be allowed by way
of exception.33 Therefore, any analogy with salam in this regard will be
in violation of this principle.
In refuting the claim that salam is admitted against the norms of
the sharīʿah or against qiyās al-Ḍ arīr, for instance, said: “The right
interpretation here is the one advocated by Ibn Taymiyyah and Ibn
Qayyim. According to them, there is nothing in the sharīah which is
against qiyās. Moreover, everything which is supposed to be against
qiyās is in fact inseparable from one of two things: either the qiyās
or analogy itself is not valid, or there is no textual evidence to prove
that the rule under discussion is from the sharīʿah, because a genuine
qiyās represents the justice for which Allah (s.w.t.) has sent His Mes-
senger. Therefore, there is nothing in the sharīʿah which contradicts a
genuine qiyās.” Based on this principle, al-Ḍ arīr added that it could be
concluded that salam is in line with a qiyās, and the qiyās upon which
31
See Kamālī, Islamic Commercial Law: An Analysis of Futures and Options, p. 255.
32
See, for instance, Al-ʿAynī, ‘Umdat al-Qārī Sharḥ Saḥ īḥ al-Bukhārī, vol. 12, pp.
61–63; Al-Shawkānī, Nayl al-Awtār, vol. 5, p. 239.
33
Ibid., vol. 5, p. 235.
56 chapter two
some scholars rely to declare salam to be against the norm is a fāsid

(imperfect) qiyās.34 Then he quoted Ibn Qayyim’s arguments against the
claim that salam is a kind of bayʿ al-mʿadūm, the sale of what one does
not possess and therefore a kind of gharar. However, since we are going
to discuss these kinds of sales in relation to futures trading in general
in separate sections, we will defer our elaboration on these issues to a
later discussion. Nevertheless, Ibn Qayyim’s conclusion is that salam is
in accordance with qiyās, public interest, and the most complete and
just legal principles.35 Ibn Ḥ ajar36 and al-‘Izz Ibn ʿAbd al-Salām37 also
advocated a similar opinion. Some contemporary scholars such as Nazīh
Ḥ ammād38 and Ajīl Jāsim al-Nashmī39 also endorsed the idea that salam
is in line with qiyās and not against it.
Thus, we conclude that the condition that the price of salam should
be delivered at the time of the conclusion of the contract is not based
on the fear of ribā or gharar as we have seen in the Mālikīs’ attitude.
This stand was endorsed and extended by modern Muslim jurists such
as al-Ḍ arīr, who maintained that it is legal to defer the price for a short
period (not necessarily three days) but it should be paid before the com-
modity is delivered.40 Yet, the classical scholars may have introduced
this condition in line with the nature of salam where the farmer would
be usually in need of the money, from the beginning of the transaction
to finance his agriculture and not because it is part and parcel of the
validity of salam. More interestingly, Ibn Ḥ ajar in his definition of salam
said “It is the sale of something prescribed in the dhimmah.”41 Then, he
added that the phrase “On condition that the price be paid at the spot
is questionable because it is not an integral part of the nature of salam
(laisa dākhilan fi ḥ aqīqatihi).”42
34
Ṣiddīq al-Ḍ arīr, “al-Salam wa Tatbīqātuhu al-Muʿāṣirah,” pp. 379–383.
35
Ibn Qayyīm, ʿIlām al-Muwaqqʿīn an Rab al-ʿĀlamīn, vol. 1, p. 350.
36
Ibn Ḥ ajar, Fatḥ al-Bārī, Maktabat al-Kulliyāt al-Azhariyyah, vol. 9, p. 305.
37
Izz Al-Dīn Ibn ʿAbd al-Salām, Qawā‘id al-Aḥ kām fi Masālīh al-Anām, Maktabat
al-Kulliyāt al-Azhariyyah, Cairo, 1968, vol. 2, pp. 111–112.
38
Nazīh Ḥ ammād, “al-Salam wa taṭbiqātuhu al-Muʿāṣirah,” pp. 553–555.
39
Majmaʿ al-Fiqh al-Islāmī, Majallat Majmaʿ al-Fiqh al-Islāmī (discussions about
salam) ninth session, 1996, no. 9, vol. 1, p. 643.
40
al-Ḍ arīr, Al-Gharar wa ʿAtharuhu fi al-‘Uqūd, p. 461.
41
It is the equivalent of personality in positive law receptacles for the capacity for
acquisition.
42
Ibn Ḥ ajar, Fatḥ al-Bārī, Maktab al-Kulliyat al-Azhāriyyah, Cairo, 1978, vol. 9, p. 303.
This proposition is also confirmed by the Mālikī insistence that the

maxim ma qārab al-shai’ yu’tā ḥ ukmahu which means that whenever
a case is very close to another they could be given the same rule could
not be applied in currency exchange because it will lead directly to ribā.
Thus, Ibn ʿAbd al-Bar maintained that even a delay of one hour or just
the disappearance of one of the contracting parties from the session of
contract is not permissible.43
It is worth noting that the Islamic fiqh Academy in its resolution
regarding salam has opted for the Mālikī opinion that the price of salam
could be delayed for three days.
To summarize the implications of delaying the price of salam for three
days according to the permissibility or not of the forward contract we
would like to point out to the following:
• There is no explicit hadith (naṣ) which states that the price of salam
must be paid at the formation of the salam contract.
• Muslim scholars relied on the ‘ḥ adīth’ of bayʿ al-kāliʾ bi al-kāliʾ, which
prohibits the sale of debt for debt, to stipulate it as a condition in
salam that the price of salam must be paid in advance to avoid the
possibility of salam becoming a kind sale of debt for debt. However,
it should be noted that the ḥ adīth of bayʿ al-kāliʾ bi al-kāliʾ is not
directly connected to salam. It is about a general principle extended
through jurisprudential analysis to the case of salam.
• It is agreed among Shariah scholars that the ḥ adīth bayʿ al-kāliʾ bi
al-kāliʾ is weak and, therefore, could not be the basis for a genuine
argument.
• Even the claim that that an ijmāʿ (consensus of Muslim scholars in
specific issue) had materialized on the issue is also disputed.
• It is most probable that Muslim scholars also relied on the tradition-
ally conceived concept of salam as practiced at that time where the
price shall be paid in advance. However, this traditionally conceived
concept of salam by which the price of salam must be paid in advance
is also contested. For instance, Ibn Hajar in his definition of salam
stated that “It is the sale of something prescribed in the dhimmah.”.
He added that the phrase that “on condition that the price is paid
43
Ibn ʿAbd al-Bar, al-Kāfī, vol. 2, p. 4.
58 chapter two
at the spot” is questionable because it is not an integral part of the

nature of salam (laisa dākhilan fi ḥ aqīqatihi.).44
• The centrality of the issue of riba and gharar in this specific issue is
clear in the discussion of Muslim scholars. The whole concept of the
prohibition of the sale of debt for debt of which the deferment of both
countervalues is one aspect is prohibited mainly on the grounds of
the possible existence of either riba or gharar.45
• On the basis of similar grounds, the Malikis have limited the per-
missibility of delaying the price of salam for a period of three days
to commodities only. This concession is not applicable to currency
exchange or ṣarf. For the Maliki, in the case of currency exchange
or ṣarf, even a delay of going inside a house to bring the exchanged
currency is not allowed because this will lead to riba prohibited in
an explicit authentic ḥ adīth stating that it should be “hand to hand.”
This is the difference between the permissibility of delay for three
days in salam and the nonpermissibility of such a delay in currency
exchange. It is based on the existence and nonexistence of riba. It is
also argued that the deferment of the subject matter in salam consti-
tutes by itself a gharar in contrast to the standard sale contract where
both countervalues shall be delivered at the formation of the contract.
However, salam is accepted by way of exception in compliance to the
authentic hadith of the Prophet. Therefore, allowing a deferment of the
price besides the deferment of the subject matter would mean addi-
tional gharar, which will render the contract void. Therefore, a delay
of three days involves only a limited degree of gharar and therefore
should be allowed. However, as explained, the assumption that salam
is accepted by way of exception and therefore, it involves gharar, is
rejected by some early Fuqahā (Shariah scholars) as well as modern
scholars such Ibn Taymiyyah ibn Qayyim, al-Izz Ibn Abdal-Salam al-
Darir, Nazih Hammad, Ajil Jasim, Ahmad Ali Abdullah and others.
44
See Ibn Ḥ ajar al-Asqalānī. Fatḥ al-Bārī. bi Sharḥ Saḥīḥ al-Bukhāri, Maktab
al-Kulliyāt al-Azhāriyyah, vol. 9, p. 305. Dasūqī, Mohammad Ibn Aḥmad Ibn ʿArafah
(n.d.) Ḥ āshiyat al-Dasūqi ʿalā al-Sharḥ al-Kabīr, vol. 3, p. 197. Ibn Rushd., Moham-
mad Ibn Aḥmad. Bidāyat al-Mujtahid wa Nihāyat al-Muqtaṣid, vol. 2, p. 204. Nihāyat
al-Muhtāj, vol. 4, p. 187. al- Fatāwāal-Hindiyyah, vol. 3, p. 187.
45
See Ibn Rushd., Mohammad Ibn Aḥ mad. Bidāyat al-Mujtahid wa Nihāyat
al-Muqtaṣid, vol. 2, p. 202; Ibn Qudāmah, Muwaffāq al-Dīn al-Mughnī. vol. 4, p. 328;
Ṣiddīq al-Ḍ arīr. 1996. “al-Salam wa Tatbiqatuhu al-Muʿasirah”, Majallat Majmaʿ al-Fiqh
al-Islāmī, ninth session.9 (1) vol. 1, pp. 392; Mohammad al- Mukhtār al- Salāmī. 2000.
“Ta’jīl al-Badalayn fi al-‘Uqūd” Nadwat al-Barakah, no. 19, 2000, pp. 2–5.
Thus, a standard salam contract does not involve gharar despite the
deferment of the subject matter because it is allowed by the Shariah
as a standard rule, not an exception, and therefore there is no gharar.46
In addition, as it is well explained by al-Darir, Muslim scholars agree
that “even if there is a level of gharar in a specific contact and there
is a real need for this contract this gharar would be tolerated and it
will not invalidate the contract.”47
• The possible justification to this limitation of three days by the Malikis,
in the case of salam in commodity and not in ṣarf, is primarily the
application of the maxim ma qārab al-shai’ yu’tā ḥ ukmahu, which
means that whenever a case is very close to another they could be
given the same rule. First of all, the Malikis consider the sale of debt
for debt where both countervalues are deferred as the weaker form
of the sale of debt for debt for the simple reason that there is no pos-
sibility of riba in this case. Second, gharar is less in this case than it
is in other cases of sale of debt. Another possibility is the prevailing
custom. Thus, Ibn Shas, a Maliki scholar said “It is not permissible to
include khiyār al-sharṭ in currency exchange. However, it is permis-
sible in salam for a delay in payment of two or three days because
he (the buyer) may need to consult others for a period during which
the subject matter will not be affected by any change. Otherwise, the
transaction will be a kind of bayʿ al-kāliʾ bi al-kāliʾ.”48 Therefore, it is
clear that “The condition that the price of salam should be paid at
the formation of the contract is stipulated by early scholars in line
with their economic conditions” as rightly observed by Mukhtar al-
Salami.49
• On the other hand, the Maliki’s option to delay the price of salam for
three days seems to be a subjective limitation. Why three days and
not one day or even twenty or thirty days? Does this differ from one
salam contact to another salam contact? Is this different from one
46
See Ibn Qayyīm, ‘Ilam al-Muwaqq‘in an Rab al-ʿAlamin, vol. 1 p. 350; Ibn Ḥ ajar
al-Asqalānī. Fatḥ al-Bārī. bi Sharḥ Saḥīḥ al-Bukhāri, Maktab al-Kulliyāt al-Azhāriyyah,
vol. 9, p. 305; ‘Izz Al-Dīn Ibn ʿAbd al-Salām. 1968. Qawā‘id al-Aḥ kām fi Maṣālīḥ al-Anām.
vol. 2, pp. 111–112; Nazīh Ḥ ammād. 1996. “al-Salam wa Taṭbiqātuhu al-Muʿāṣirah”,
Majallat Majmaʿ al-Fiqh al-Islāmī, pp. 553–555; Majmaʿ al-Fiqh al-Islamī, Majallat
Majmaʿ al-Fiqh al-Islamī, (discussions about salam), ninth session, 1996, no. 9, vol. 1,
p. 643; Ṣiddīq al-Ḍ arīr (1995), Al-Gharar wa Atharuhu fi al ‘Uqūd, p. 461.
47
See Majallat Majmaʿ al-Fiqh al-Islāmī, no. 9, vol. 2, p. 325 & pp. 333–334; Ibn
Qudāmah, al-Mughnī, vol. 4, p. 326; Ibn Abidin, Ḥ ashiyat Ibn Abidīn, vol. 4, p. 284.
48
See Ibn Shas, al-Jawahir al-Thaminah, vol. 2, p. 461.
49
See Majallat Majmaʿ al-Fiqh al-Islāmī, 1996, no. 9, vol. 234.
60 chapter two
subject matter of salam of contact to another and from one custom

to another? The application of this concept by the Maliki school
reflects its subjective nature. Thus, even within the Maliki school the
ruling may differ if the delay of three days or more is agreed upon by
the parties at the formation of the contact or not, and whether the
price of salam is paid in kind or not.50 As al-Ashgar rightly put it in
his argument against the Maliki opinion, “If delay for two or three
days is permissible it should be permissible for more than that if the
economic conditions changed and such a delay will lead to instabil-
ity and dispute.”51 Al-Ashgar seems to be right in concluding that if
delay for two or three days is permissible, it should be permissible for
more than three days if the economic conditions changed. However,
his argument that such a delay may lead to dispute is questionable.
The practice of the modern forward contract is obvious and shows
that there is no instability or dispute in such cases.
• Thus, for the Fiqh Academy to follow the Maliki opinion is enough
by itself to show that delay of both countervalues in salam does not
invalidate the contract regardless whether this delay is for three days
or more or less if the economic conditions have changed. Yet, as we
have explained, the limitation to three days is subjective. Therefore,
if it is permissible to delay the price in salam for three days it will be
permissible to delay it even for more than three days. In contrast, if
the delay by itself invalidates the contract, and the length of the delay,
even of one day or one hour will invalidate the contract as is the case
with currency exchange or ṣarf. Moreover, if a delay for three days is
permissible in salam, which is allowed not as an exception but as a
principle, it will be permissible to delay longer than that with regard
to the forward contract by way of analogy based on the argument
followed in the present study that salam is in line with qiyās and not
against it, and, therefore, it could be the basis for qiyās.
Based on the above argument and the fact that salam is in line with
qiyās and not against it, we could say that the modern forward contract
is a valid contract by way of analogy to salam.
50
See al-Hattab, Mawahib al-Jalil Sharh Mukhtasar Khalil, Maktabat al-Najat, vol. 4,
pp. 514–517; al-Khirshi ala Mukhtasar Khalil, Dar Sadir Beirut, vol. 5, pp. 202–204.
51
al-Ashqar, “Aqd al-Salam” in Buhūth Fiqhiyyah fi Qadāyā Iqtisādiyyah Muʿasirah,
Dār al-Nafāʾis, 1998, vol. 1, p. 193.
Istiṣnāʿ and the Forward Contract
Besides salam, the conventional forward contract has also some simi-
larities with the contract of istiṣnāʿ, which is a contract for selling a
manufacturable thing with an undertaking by the seller to present it
manufactured from his own material, with specified descriptions and at a
determined price.52 As in the case of salam, for the contract of istiṣnāʿ to
be legal, several conditions should be fulfilled. Those conditions are:
1. The object of the contract must be precisely determined both in its

essence and quality.
2. The time of delivery must be specified (short or long) to avoid
confusion of date of delivery, which may otherwise lead to conflict
between the parties.
3. The manufacturer should supply the material. If the material is sup-
plied by the buyer, the contract is ijāra and not istiṣnāʿ.
4. The place of delivery should be specified if the commodity needs
loading or transportation expenses. In addition, it is important to
note that unlike salam it is not a condition in istiṣnāʿ to advance
the payment, though it is permissible to do so. Otherwise it could
be deferred or made in instalments. Moreover, it is not a condition
that the seller be an expert in manufacturing.53
Thus, istiṣnāʿ is more in line with the conventional forward contract

where the price is not paid in advance as well. However, according to
the majority of Muslim jurists, istiṣnāʿ cannot be applied to commodities
that are normally available in the market. It is basically a manufacture or
production contract unlike salam, which is basically a trading contract.
Thus, a seller agreeing to provide a product in the future under istiṣnāʿ
will have to be a producer or have to establish a parallel contract with
a producer.54 It is clear from the contractual specifications of istiṣnāʿ
52
Muṣtaphā al-Zarqā, ʿAqd al-Istiṣnāʿ wa madā Ahammiyatuhu fi al-Istithmārāt
al-Muʿāṣirah, (Lecturer series of renowned scholars no. 12.), Jeddah Islamic Develop-
ment Bank, 1995, p. 12.
53
See Islamic Fiqh Academy’s resolution no. 66 /3/7 on istiṣnā‘; Muṣtaphā al-Zarqā
ʿAqd al- istiṣnāʿ wa madā ahammiyatuhu fi al-Istithmārāt al-Islāmiyah al-Muʿāṣirah,
Islamic Development Bank, Jeddah, 1995, p. 11; Muhammad al-Bashīr Muhammad
al-Amine, Istiṣnāʿ in Islamic Banking and Finance: The Law and Practice, A.S. Nordin,
Kuala-Lumpur, Malaysia, 2001, pp. 48–53.
54
Ibid.
62 chapter two
that it is almost the same as the modern forward contract. It should be

noted that the deferment of price in istiṣnāʿ, according to the classical
scholars, is allowed on the basis of istiḥ sān and need rather than norms.
Therefore, one may argue that the need for the modern forward contract
is similar to that of istiṣnāʿ if not moreso. Thus, it should be allowed
on the same grounds. The difference between istiṣnāʿ as a production
contract and the modern forward contract as a trading contract should
not be used as an excuse to reject the forward contract.
It is noteworthy that although salam and istiṣnāʿ are not typical
forward contracts, they do fulfill some of its benefits. The following
example will illustrate. Suppose the defense department of a country
needs for its army one million uniforms which would require about
six million meters of cotton cloth. It is not possible for any supplier to
provide these uniforms from its ready stock. The supplier approaches
the largest textile manufacturer. Looking at his present commitment,
the manufacturer would require about twelve months to manufacture
and deliver six million meters of cloth. The manufacturer will not be
able to deliver the cloth on time if for some reason the raw cotton goes
into short supply after six months, when he would need it. Therefore,
to be on the safe side he enters into a firm commitment with wholesale
dealers of raw cotton to start supplying after five months and continue
its supply over the next six months. The wholesale dealers enter into
an agreement with farmers to supply raw cotton at the required future
date. The price to the farmers is settled in advance. Looking at their
costs and the sale price, the farmers can decide on their acreage for
cotton and make efforts to control their expenses.
In this chain, a number of agreements take place. The farmers agree
to supply raw cotton to the wholesalers, who agree to supply it to the
textile manufacturer. The manufacturer agrees to supply the cloth to the
contractor supplier who arranges to stitch uniforms and supply them
to the defense department. At each stage the price is settled in advance
while the object of sale is not in existence.
The contract between the supplier of the uniforms and the defense
department and between the supplier of the uniforms and the textile
manufacturer is covered by the rules of bayʿ al-istiṣnāʿ. Under bayʿ
al-istiṣnāʿ the two parties can agree on the sale of a nonexistent product
as it is elaborated. A certain percentage of the sale price as an advance
is also permissible. The contracts between the textile manufacturer and
the wholesaler and between the wholesaler and the farmer are covered
by the law of bayʿ al-salam.55 Thus, in this transaction istiṣnāʿ and salam
achieved some of the benefits of the conventional forward contract.
However, this may not be always the case and there is a need for the
adoption of the forward contract in Islamic finance.
Ibtidāʾ Al-Dayn Bi Al-Dayn and the Forward Contract
The sale of debt for debt, called by the Mālikīs ibtidāʾ al- dayn bi al-
dayn (deferment of both countervalues), is at the core of forward trad-
ing. Therefore, we shall try to discuss it briefly here while deferring the
detailed discussion on debt trading to our analysis of bayʿ al- dayn bi
al- dayn in general. The different schools of law have prohibited this
form of sale of debt, for various reasons. For some the sale involves
ribā while for others it is gharar. The Mālikīs consider this form of bayʿ
al- dayn bi al- dayn as one of the lesser evils.56
Rafīq al-Maṣrī, for instance, argued that no extra gharar is involved
in deferring both countervalues compared to the deferment of one of
them only. In other words, if one of the countervalues has been deliv-
ered while the other is deferred for a future date or both of them are
deferred, the level of risk is the same and there is no possibility of extra
gharar. Let us assume a case where a buyer receives a commodity but
defers the payment of the price; there is a possibility that during this
period the price of the commodity may fluctuate. Therefore, one of the
parties will bear the impact of this fluctuation. It could be the seller if
the spot price goes up or the buyer if the opposite happens. This is what
always occurs in the case of salam. The risk will be the same even if both
countervalues are deferred. Of course, in the case of deferment of just
one countervalue, one of the parties to the contract will benefit from
his receipt either of the commodity in the deferred sale or the price in
the case of salam. However, the gharar remains the same, even if both
countervalues have been deferred. Both parties will share the instant
55
See Muhammad Akram Khān, “Commodity Exchange and Stock Exchange in
Islamic Economy,” American Journal of Islamic Social Science, vol. 5, issue. 1, 1988,
pp. 96–97.
56
See for instance, al-Jaṣṣaṣ, Aḥ kām al-Qurʾān, Dār al-Fikr, Beirut, vol. 1, p. 483;
al-Shāfīi, al-ʾUmm, al-Shaʿab, Cairo, vol. 3, p. 87; al-Nawawī, al-Majmūʿ, vol. 9, p. 435.
Ibn Taymiyyah, al-Qiyās, Dār al-Āfāq al-Jadīdah, Beirut, 1982, p. 16.
64 chapter two
risk, as it is in the case of mushārakah. Therefore, in a case where the

price remains stable both parties will not be affected. However, if the
prices go down, the buyer will be affected as opposed to the seller. Thus,
there is no difference in the level of risk in both situations, and there
are no grounds for the claim made by some scholars that the risk or
gharar would be greater if both countervalues were deferred.
On the other hand, it should be noted that there is a need for such
a sale (where both countervalues are deferred, that is, the forward
contract), similar to the need for salam. It is possible that someone may
be in need of a commodity in the future and he may not possess the
money for it at the time of the contract or he may want to pay it by
installments. Therefore, the forward contract will solve such a problem.
At the same time, the seller may not be in need of the payment as the
case of istiṣnāʿ and tawrīd contracts (forward contracts).
Rafīq al-Maṣrī went on to argue that only the Ḥ anafīs allowed the
deferment of both contervalues in istiṣnāʿ based on istiḥ sān, making
it a separate contract from salam. Therefore, it will be useful if the
deferment of both countervalues is allowed in the sale using a tawrīd
or (forward contract) on the same ground.57 He concluded that the sale
where both contervalues are deferred may sometimes involve a benefit
for the contracting parties and since the ḥ adīth concerning the prohi-
bition of bayʿ al-kāli bi al-kāli is not authentic, then it is irrelevant to
think that this contract and other similar contracts are against sharīʿah
rules. Indeed, we acknowledge that some cases involving the defer-
ment of both countervalues may involve harm or a suspected interest.
However, this does not apply to all cases, such as, for example, the
contract of tawrīd (forward contract). It is possible to accommodate
this contract on the basis of the general principles without resorting to
istiḥ sān (departure from a ruling in a particular situation in favour of
another ruling, which brings about ease).58 Furthermore, the objective
of the forward contracts or ‘uqūd al-tawrīd is to satisfy the need of
some public institutions, factories, and construction companies, which
are in need of certain materials on a specific date and may not be in
need of the money at the time of the contract. This is in contrast to the
57
For more details, see Rafīq al-Maṣrī, al-Jāmiʿ fiʾUṣūl al-Ribā, Dār al-Qalam,
Damascus, 1991, pp. 339–344.
58
Ibid., pp. 346–347.
objective of paying the cost at the time of the contract in salam, which
is to finance the seller.
Refuting the claim of involvement of gharar that might lead to dis-
pute due to the deferment of both countervalues, Mukhtār al-Salāmī
observed that the basic possibility of dispute is present in all forms of
transactions, which did not render these transactions invalid. However,
if it is argued that the possibility of dispute is higher in the case of the
deferment of both countervalues, then this is not true. The contracting
parties will specify clearly the price and the subject matter in a written
agreement. Therefore, the possibility of dispute is minimal and the his-
tory of transactions in the future contracts market testifies to that.59
It should be noted in this connection that the very conservative view
taken by the majority of classical Muslim scholars is based on their
misconception that a salam contract is admitted or legalized against
the norms or qiyās.60
Bayʿ Al-Ṣifah and the Forward Contract
Bayʿ al-ṣifah is the sale of something, well described, that is not pres-
ent at the time of contract but will be delivered in future.61 Although
the sale by description or bayʿ al-ṣifah is accepted by the Ḥ anafīs62 and
Ḥ anbalīs,63 the approach taken by the Mālikīs64 is more in line with our
analogy between bayʿ al-ṣifah and the forward contract. The Ḥ anafīs
validate the sale by description or bayʿ al-ṣifah and they guarantee the
buyer the option of inspection (khiyār al-ru’yah) whether the subject
matter of the contract is presented according to the agreed upon condi-
tions or not.65 On the other hand, the Mālikīs and Ḥ anbalīs guarantee
59
Mukhtār al-Salāmī, “Taʾjīl al-Badalain fi al-‘Uqūd,” paper presented in Nadwat
al-Barakah al-Tāsiaʿh ʿAsharah lil iqtiṣād al-Islāmī, Makkah al-Mukarramah, 2–3
60
Al-Kāsānī, Badāii al-Sanāii, al-Matbʿah al-Jamāliyyah, Egypt, 1967, vol. 5, p. 201;
Ibn Rushd, Bidāyat al-Mujtahid wa Nihāyat al-Muqtaṣid, Dār al-Kutub al-Ḥ adīthah,
Egypt, vol. 2, p. 228; and al-Buhūtī, Sharḥ Muntahā al-Irādāt, Egypt, vol. 2, pp. 218– 221.
61
See Ibn Rusd, al-Muqaddimāt al-Mumahhadāt, Beirut, Dār al-Gharb al-Islāmī,
1988, vol. 2, p. 76.
62
See Ibn ʿĀbidīn, Rad al-Muḥ tār ʿalā al-Dur al-Mukhtār, Dar al-Kutub al-‘Ilmiyyah,
Beirut, vol. 4, p. 21.
63
al-Buhūtī, Sharḥ Muntahā al-Irādāt, Egypt, vol. 2, pp. 218–221.
64
Al-Dirdīr, al-Sharḥ al-Kabīr ʿalā Khalīl, Beirut, Dār al-Fikr, Beirut, vol. 3, p. 27.
65
Ibid.
66 chapter two
the buyer the right to khiyār al-ru’yah only when the commodity is
presented without fulfillling the conditions required.66 However, the
Mālikīs and Ḥ anbalīs differ in the mode of payment. It is a principle
in the Mālikī school67 that the price must not be paid at the time of the
conclusion of the contract in contrast to the principle in the Ḥ anbalī
school.68 Moreover, according to the Mālikīs, bayʿ al-ṣifah is permissible
in everything, while the Ḥ anbalī school restricts it to what is permissible
in salam only. The above concept of bayʿ al-ṣifah in the Mālikī school
is in line with our analogy.
On the possibility of accommodating the conventional forward con-
tract as a kind of bayʿ al-ṣifah, ʿAbd al-Wahhāb Abū Sulaimān main-
tained that first, bayʿ al-ṣifah and then, the forward contract, are based
on a detailed description of the subject matter, relying on previous
observation. Second, in both contracts the subject matter is absent
and the parties have a real intention to fulfill the contract and want it
to be executed according to the time and place specified. Third, both
contracts fulfill the characteristics of bayʿ al-ṣifāt (sale by description)
and not bayʿ al-ʾaʿyān (the sale of objects in rem). Lastly, in both con-
tracts both contrevalues are deferred although the price could be paid
by installments as well.69
Given the close similarities between the two contracts and the fact
that the conventional forward contract is immune from ribā and gha-
rar, which are the most commonly advanced arguments to invalidate
it, we could say the forward contract is a valid contract in Islamic law.
The forward contract is immune from gharar in the sense that the pos-
sibility of the seller not being able to make delivery (due to difficulties
in getting the subject matter of the contract) is very remote and could
not be compared to cases of “birds in the sky” or “fish in the deep sea,”
which represent the standard concept of gharar. Similarly, there is no
risk regarding the subject matter of the contract since it is well defined
and not similar to cases such as “I am selling to you what is in my
hand” or “what is in my box” without showing it.70
66
al-Zurqānī, Sharḥ al-Zurqānī ʿalā Muqtaṣar Khalīl, Beirut, Dār al-Fikr, Beirut, 1978,
vol. 5, p. 38; Ibn Qudāmah, al-Mughnī, Dār al-Fikr, Beirut, vol. 4, p. 56.
67
Al-Dirdīr, al-Sharḥ al-Kabīr ʿalā Khalīl, Beirut, Dār al-Fikr, Beirut, vol. 3, p. 27.
68
al-Buhūtī, Kashshāf al-Qināʿ, vol. 3, p. 164.
69
See ʿAbd al- Wahhāb Abū Sulaimān, “ ʿAqd al-Tawrīd Dirāsah Fiqhiyyah
Taḥlīliyyah,” paper presented to the twelfth session of the Islamic Fiqh Academy, Rabat,
Morocco, pp. 2–3.
70
Ibid., pp. 44–47.
Aḥmad ʿAli ʿAbd Allāh has also argued in favor of the permissibil-
ity of the forward contract by analogy to bayʿ al-ṣifah. He maintained
that salam is accepted according to the norms of shariah and it is not
against giyas as it is claimed by many scholars. Therefore, we can make
an analogy by considering the salam a kind of bayʿ al-ṣifah in order to
accommodate the conventional forward contract. He also refuted the
claim that it is part of the prohibited sale of debt for debt or the sale
of what is not with you.71
Nonexistence of the Subject Matter and

the Forward Contract
The importance of studying the existence of the subject matter of a

contract during the conclusion of a forward contract lies, first of all, in
the fact that the forward contract is basically a future trading contract
where the matter is nonexistent at the time of the contract. Second,
due to their interpretation of the ḥ adīth, “Do not sell what is not with
you,”72 many scholars have rejected the forward contract because it is not
similar to salam. They argued that it must fulfill all conditions of salam
in order to be legal. However, for Ibn Qayyim there is nothing in the
sharīʿah which is against qiyās. Moreover, everything which is supposed
to be against qiyās is in fact inseparable from one of two things: either
the qiyās or analogy itself is not valid or there is no textual evidence to
prove that the rule under discussion is from the sharīʿah, because the
genuine qiyās represents the justice for which Allah (s.w.t.) has sent His
Messenger. Therefore, there is nothing in the sharīʿah which contradicts
the genuine qiyās.73 Even the contract of salam, which has been accepted
by some scholars only due to the specific ḥ adīth concerning it, is con-
sidered against qiyās, although for Ibn Qayyim it is in accordance with
qiyās.74 Ibn Qayyim refutes the claim of certain scholars that the sale of
nonexistent things is prohibited in Islamic law. He argues that there is
no evidence from the Book of Allah, the Sunnah of His Prophet, or the
saying of any of the Companions that the sale of a nonexistent item is
71
Aḥmad ʿAli ʿAbd Allāh, “al-Bayʿ ʿalā al-Ṣifah,” pp. 3–15.
72
Abū Da’ūd, Sunan, ḥ adīth No. 2187.
73
Ibn al-Qayyim, Iʾlām al-Muwaqqīʾn ʿan Rabbi al-ʾĀlamin, Dār al-Kutub al-‘Ilmiyyah,
Beirut, Lebnan, 1991, vol. 1, pp. 383–4.
74
Ibid., vol. 1, p. 399.
68 chapter two
illegal, but rather what is reported in the Sunnah is the prohibition of

some existing items and some nonexistent ones as well. Therefore, the
ratio decidendi of this prohibition is not the existence or the nonexistence
of the subject matter. What is at issue in the Sunnah is the prohibition
of any kind of sale involving risk ( gharar), where it is impossible to
deliver the item, whether it exists or not.
Furthermore, the Lawgiver has permitted the sale of some nonexisting
items in certain cases, such as the sale of fruits, which have appeared on
the trees but have not yet ripened and are therefore not of immediate
use at the time of the contract.75
After elaboration of the basic principles related to this ḥ adīth, we
now move on to the issues concerning interpretations of the ḥ adīth.
They are as follows:
1. “Do not sell what is not with you” means not to sell what one does
not own (la tabi‘ma laisa ‘indaka) at the time of sale. One of the basic
requirements of sale, as al-Kāsānī stated, is that the seller owns the
object of sale when selling it, failing which the sale is not concluded,
even if the seller acquires ownership later. The only exception is the
salam sale, where ownership is not a prerequisite. According to this
interpretation, al-Sanʿānī stated that this phrase implies that it is not
permitted to sell something before owning it. Ibn al-Humām and
Ibn Qudāmah similarly concluded that a sale involving something
that the seller does not own is not permitted even if he/she buys and
delivers it later.76
2. Some other jurists and ḥ adīth scholars hold that this ḥ adīth applies
only to the sale of specified objects (al-ʾaʿyān) and not to fungible
goods, as these can be substituted or replaced with ease. Al-Baghawi77
and al-Khattābi,78 in contrast, are among the scholars who stated
that this prohibition is confined to the sale of objects in rem (buyuʿ
al-ʿaʾyān) and does not apply to the sale of goods by description
(buyūʿ al-ṣifāt). Hence, when salam is concluded for fungible goods
that are readily available in the locality, it is valid even if the seller
75
Ibn Qayyim, I’lām al-Muwaqqi‘īn, vol. 1, p. 219.
76
Muhammad Ibn Ismā ‘il al-Sanʾānī, Subul al-Salām Sharḥ Bulūgh al-Marām, al-
Maktabah al-Tijāriyyah, Cairo, n.d., vol. 3, p. 17.
77
al-Baghawī, Abū Muhammad al-Ḥ usayn, Sharḥ al-Sunnah, al-Maktab al-Islāmī,
Damscus, n.d., vol. 8, pp. 140–141.
78
Al-Khaṭtạ̄ bi, Maʿālim al-Sunan, Cairo, Matbʿat al-Sunnah, n.d., vol. 5, p. 143.
does not own the object at the time of contract. Al-Khattābī has said
that this ḥ adīth refers to the sale of specific objects for the Prophet
permitted deferred sales of various kinds, in which the seller did
not have the object of sale at the time of contract. In essence, this
prohibition seeks to prevent gharar in sales (e.g., a runaway camel,
uncertainty over delivery, and sale of someone’s property without
his or her permission).
3. A third position is that a sale of “what is not with you” means the
sale of what is not present and what the seller cannot deliver. This
is the view of Ibn Taymiyah, who stated that the emphasis is on the
seller’s inability to deliver, which entails risk-taking and uncertainty
(mukhāṭarah wa gharar). If the ḥ adīth were taken at face value, it
would proscribe salam and a variety of other sales. However, this is
obviously not intended. The Prophet forbade Ḥ akim Ibn Ḥ izām to
sell the particular objects either because he might not own them or
because he might not be able to deliver them. The latter reason is
more likely to be the basis for the prohibition, otherwise the cause
or ʿillah is available even in salam. Some Mālikis held similar views.
It is quite possible that the seller owns the object but is unable to
deliver it, or that the seller possesses the object but does not own it.
In either case, the sale would fall within the purview of this ḥ adīth.
Therefore, the ḥ adīth underlines neither ownership nor possession,
but rather the seller’s effective control and ability to deliver. There-
fore, the only effective cause of the prohibition (ʿillah) is gharar on
account of one’s inability to deliver.79
Finally, some contemporary legal writers such as ʿAli Abd al-Qādir,80

Yusuf Mussā,81 and Yusuf al-Qaradāwī82 have considered the changes
of the market in the present circumstances compared to the time of
the Prophet. During the Prophet’s time the market was so small that
it did not give the assurance of regular supplies at any given time. In
contrast, the modern markets are regular and extensive, which means
that the seller can find the goods at almost any time and make delivery
79
al-Baghawī, Abū Muhammad al-Ḥ usayn, Sharḥ al-Sunnah., vol. 8, pp. 140–141.
80
ʿAlī Abd al-Qŭdir, “Taʿqīb ʿalā Raiʾ al-Tashrīʿ al-Islāmī fi Masāʾil al-Burṣah,” p. 439.
81
Muhammad Yousuf Musa, al-Buyūʿ wa al-ʿAmaliyyāt al-Māliyyah al-Muʿāṣirah,
Cairo, Dār al-Kitāb al-ʿArabī, 1954, p. 193.
82
al-Qaraḍāwī Youssuf, Bayʿ al-Murābaḥ ah li al-ʿĀmir bi al-Shirāʾ Kamā Tujrīh
al-Maṣārif al-Islāmiyyah Dirāsah fi Dawʿ al-Nuṣūṣ wa al-Qawā‘id al-Sharʿiyyah, Cairo,
Maktabat Wahbah, 1987, p. 19.
70 chapter two
as may be required.83 Therefore, the possibility of gharar or a dispute

is not present here.
However, despite the numerous Islamic principles by which the
conventional forward contract could be accommodated and despite
the weakness of the different arguments advanced against its legality,
some scholars84 still insist that if the forward contract is considered a
binding contract, then it is an invalid contract. Therefore, according
to these scholars, to meet the real need for such a transaction, it must
be considered as a mutual promise between the two parties but not a
contract. Thus, both parties must fulfill their promise but if one of them
cannot do so for genuine reasons, he will not be obliged to do so. But
it he fails to meet his obligations without genuine reasons, he shall be
obliged by the court to pay damages to the affected party.
However, it should be noted that despite the fact that these scholars
attempted to draw a distinction between a contract and a promise that
is binding upon both parties, it seems difficult to maintain these dif-
ferences in practice.
Thus, we argue that the conventional forward contract has great
benefits and it could be accommodated in Islamic law whether under
the general theory of contract and conditions or by analogy to salam,
ʾistiṣnāʿ, or bayʿ al-ṣifah, since it does not involve ribā or gharar. More-
over, it is not included in the prohibited forms of sale of debt nor does
it oppose the principle “do not sell what is not with you.”
Before concluding our discussion of the forward contract in com-
modities, it is worth noting that although spot trading is basically a
contract for the physical delivery, sometimes the contract may involve
some elements of forwarding. Thus, for instance, in crude oil a spot
trading is a contract for the physical delivery of crude oil as soon as
possible. Because of the volume of the commodity involved in oil trad-
ing and the logistic difficulties of transporting it from place to place,
it is fair to say that in respect to oil nearly all “spot” trading involves
an element of passage of time or forwarding. Refineries often book oil
into their refining runs several weeks in advance and although these
are considered “spot” orders, the distinction between spot, forward,
83
For further details, see Kamālī, “Islamic Commercial Law, An Analysis of Futures,”
The American Journal of Islamic Social Sciences, vol. 13, Summer 1996, no. 2, pp. 205–7.
84
See Taqi al-Usmāni, “ ‘Uqūd al-Tawrīd wa al-Munāqaṣāt,” paper presented at the
twelfth session of the Islamic Fiqh Academy, pp. 3–11.
and other derivatives trading is not clear in all business.85 Furthermore,

if the permissibility of the forward contract in commodities is estab-
lished as it has been elaborated, how about the exchange of gold on a
deferred basis?
85
Edward J. Swan, McKenna & Co., “Derivatives and the Control of Oil,” Edward J.
Swan, (ed.) Derivatives Instrument Law, Cavendish Publishing Limited, p. 52.
CHAPTER THREE
IS IT PERMISSIBLE TO EXCHANGE GOLD WITH

PAPER MONEY ON FORWARD BASIS?
The discussion of the forward market in commodities will not be com-

plete unless the issue of trading gold on a forward basis is explored.
First of all, it should be noted that the different aḥ adīth on the issue
have explicitly mentioned that gold for gold, silver for silver, and gold
for silver should be traded hand to hand or on a spot basis. However,
this rule is based, according to the majority of Muslim jurists, on a
rationale or ʿillah applicable to silver and gold. Yet the different schools
of Islamic law have issued several interpretations to determine this ʿillah.
The question arises as to whether these different ʿilal or causes postulated
by the classical jurists are still relevant to the prohibition of gold and
silver trading on a forward or nasīʾah basis at present. However, first
the study will give a brief history of the world monetary system due to
the central position of gold in it on one hand, and due to the fact that if
gold is still money it will not be permissible to trade on a forward basis
while it would be possible to do so if gold lost this characteristic.
Historical Sketch of the World Monetary System
There are two basic types of economic trading system: barter economies
and monetary economies. Each system, in turn, can take different forms.
Barter is the direct exchange of goods and services for other goods and
services. There must be a double coincidence of wants. However, a pure
barter economy has several shortcomings, such as absence of a method
of storing generalized purchasing power, absence of a common unit
of measure and value, and the absence of a designated unit to use in
writing contracts requiring futures payment.1
1
See Roger LeRoy Miller and David D. VanHoose, AC, Modern Money and Banking,
McGraw-Hill, USA., Third International Edition, 1993, pp. 10–12.
trading gold on a forward basis 73
On the other hand, money has existed in diverse forms. Most types of
money that were used are commodities monies. They are physical com-
modities monies. Early commodities monies, such as wool, boats, sheep,
and corn had equivalent monetary values and nonmonetary values.
More advanced societies that were able to mine and process scare metals
like gold and silver found that these metals possessed in abundance the
key properties of satisfactory money. Gold and silver are recognizable
and are durable metals. While heavy, they nonetheless are portable. It
is possible to measure their purities as metals, so that individuals can
standardize them by both weight and degree of purity. Heating and
chemical and physical processes can make gold and silver completely
divisible. For this reason, gold and silver have been predominant types
of commodity monies.2 The following is a list3 of some of the different
types of money that have existed throughout history.
Iron Red woodpecker scalps Leather

Copper Feathers Gold
Brass Glass Silver
Wine Polished beads (wampum) Knives
Corn Rum Pots
Salt Molasses Boats
Horses Tobacco Pitch
Sheep Agricultural implements Rice
Goats Round stones with centers Cows
Tortoise shells removed Slaves
Porpoise teeth Crystal salt bars Paper
Whale teeth Snail shells Cigarettes
Boar tusk Playing cards
On the other hand, the monetary system that prevailed during the
Prophet (PBUH) days was essentially a bimetallic standard with gold
and silver coins circulating simultaneously. The ratio that prevailed
between the two coins at that time was 1:10. Such stability did not,
however, persist. The two metals faced different supply and demand
conditions which tended to destabilize their relative prices. Thus, during
the Umayyad period it reached 1:12, while in the Abbasid period after
2
Ibid.
3
Ibid., p. 12.
74 chapter three
that, it reached 1:15. The decline of silver continued until it reached 1:35
and 1:50 at certain times. When the United States adopted bimetallism
in 1792, the gold/silver price ratio was 1:15. However, the fluctuating
price of both metals led the United States to demonetize silver in 1873.
The experience of several other countries suggests that bimetallism was
a fragile standard. This was the cause of its universal demise.4
Silver continued to loose ground and the gold standard become preva-
lent around the world and emerged as the true international standard
by 1880. Monometallism hence took its place. Under this standard,
the value of a country’s currency was legally defined as fixed weight
of gold and the monetary authority is under an obligation to convert
the domestic currency demand into gold at the legally prescribed rate.
Historically, there have been three variants of the gold standard: the
gold coin standard, when gold coins were in active circulation; the
gold bullion standard, when gold coins were not in active circulation
but the monetary authority undertook to sell gold bullion against the
local currency at the official rate; and the gold exchange standard (or
the Bretton Woods system) when the monetary authority was required
to exchange domestic currency for US dollars which could be converted
into gold at a fixed parity. The rules of the gold standard required deficit
countries to deflate and the surplus countries to reflate their economies.
This seemed unrealistic during the Great Depression when the deficit
countries had no alternative but to reflate the economies to reduce
unemployment.5
The financial needs of the Second World War and post-War recon-
struction made the return to the gold standard even more difficult and
the Bretton Woods system become universally adopted after the Second
World War. US dollars became the cornerstone of this system because
at the end of the Second World War the United States had around two-
thirds of the world’s monetary gold. By the late 1950s, the growth of
the world monetary gold stock was insufficient to finance the growth
of world output and trade. The dollars supplied by the United States
deficit helped provide the needed liquidity. However, the persistent US
deficits led to a continuous decline in its gold holdings and undermined
its ability to maintain the dollar’s convertibility into gold. Ultimately the
4
Umer Chapra, “Monetary Management in an Islamic Economy,” Islamic Economics
Studies, Islamic Development Bank, vol. 4, no. 1, 1996, pp. 1–2.
5
Ibid., pp. 2–3.
US was forced to demonetize gold in August 1971. Thus, a new era of

fully-fledged managed money standard having absolutely no link with
gold emerged. The system, which at first was adopted by the force of
circumstances, acquired an official character after the ratification of the
Second Amendment to the IMF Articles of Agreement April 1978.6
Critical Analysis of Several Fatwās on Gold Trading
In order to explore the opportunities available in the international gold

market, several Islamic banks have requested clarification about the issue
from their respective sharīʿah boards. However, there is no definitive
answer and some of these sharīʿah boards have tried to repeat the pre-
vailing stand on the issue without relating it to the current reality.
Thus, the International Association of Islamic Banks in its working
paper presented to the high sharīʿah board for a sharīʿah ruling on the
issue, in its formulation of a request by the Dubai Islamic bank for a
fatwā on the issue said: Given the fact that Islamic banks are not dealing
in the currency market like conventional commercial banks, and since
the investment in the gold market provides considerable and fundamen-
tal guarantees for good investment, the gold market has become a very
attractive one for Islamic banks. In other words, some of these banks
found the gold market as a good alternative to the currency market.
In addition, although the gold market is also not immune from the
market forces of loss and profit, it is much more stable, the liquidity is
better, and the risk is less, given the quick response and better analysis.
Furthermore, gold and other precious metals have organized markets
and trading in gold is through special brokers. The following two are
among the different modes of transaction in these markets:
1. Buying gold and keeping it for sale when the prices are better.
2. Exchanging a mutual promise for the purchase or sale with mutual
delivery taking place at an agreed upon date in the future. In other
words, the parties agree upon the purchase or sale of a specific
amount of gold of a specific quality to be delivered at a future date.
The mutual promise is executed at maturity.
6
Ibid., p. 3.
76 chapter three
Therefore, the Dubai Islamic Bank requested the Association to give

its fatwā7 on the issue with all the arguments and supporting evidence.
It will be noted, of course, that the issue is of general interest to all
Islamic banks.
The response of the sharīʿah board was as follows: first of all, the
bases for problems relating to the issue of gold trading, whether real or
hypothetical, are no longer present nowadays. The medium of exchange
and currencies have taken a new form. However, some Muslims still
consider these currencies as they were before, namely backed by gold or
silver. Thus, if the present currencies of paper money are exchanged with
each other, some consider it as an exchange of gold or silver with each
other. Therefore, they inquire about the existence of ribā al-faḍl (Riba
pertaining to trade contracts. It refers to exchange of different quanti-
ties (but different qualities) of the same commodity. Such exchange in
particular commodities defined in the sharīʿah is not allowed.) or ribā
al-nasīaʾh (Riba pertaining to loan contracts). However, the concept of
currency as it is reported in the classical fiqh books no longer exists
today in international economic thought. The nature of the present cur-
rency is that of currencies backed by the law of the country and as part
of the total output of the national economy, whether goods or services.
If gold or silver is traded in exchange for these currencies it does not
represent an exchange of gold or silver with each other. Therefore, gold
trading as presented in the question is not an exchange of gold for gold,
because the paper money is not gold but part of the national output of
goods and services. In such a transaction, there is no possibility of ribā,
because one of the countervalues is gold while the other is not.
The board went on to say that although the classical scholars had
based their analysis on the concept of currency backed by gold and
silver, this would not be the mechanism for those who came after them
with regard to modern currency. The modern economic system is based
on developed economic thought and it is a necessity imposed on our
societies. On the other hand, the sharīʿah, which is viable for all times
and places, would not reject such a mechanism. Therefore, to stick to
something that has already been superseded by time contradicts the
nature of the shariʿah, which does not recognize stagnation or ḥ araj.
7
See Bayt al-Tamwīl al-Kuwaitī, al-Fatāwā al-Sharʿiyyah fi al-Masāʿil al-Iqtiṣādiyyah,
Kuwait, 1988, pp. 546–553.
The Sharīʿah Board of the International Association of Islamic Banks

continues its argument by pointing out that the classical concept of
currency was not a binding sharīʿah rule but a matter of custom at that
time. Therefore, it is not necessary to abide by it. This is based on the
saying of the prophet, “Do not sell gold for gold unless equal for equal
and with equal measurement.” Commenting on the ḥ adīth, Abū Ḥ anīfah
and his disciple Muhammad al-Shaybāni said, “What is reported in the
text as weighable or kailiyyan should remain forever so.” However, Abū
Yousof, the other disciple of Abū Ḥ anīfā, disagreed on the issue. For
him what is reported as weighable could be kailiyyan and vice versa
according to the prevailing custom. And what is reported in the text
(naṣ) is just what prevailed at that time.8
Inspired by this argument, the Board maintained that the classical
concept of currency was not a binding sharīʿah rule but a matter of
custom at that time. Therefore, we should not base our analysis on the
concept of currencies, which are based on or backed by gold. Finally,
it should be noted that, in principle, all transactions are valid unless
they contradict a clear naṣ or text, which is not available in the case
before us.9
However, it seems that this opinion is based on shaky legal argu-
ments. First of all, this analysis disregards totally the ʿillah or the ratio
behind selling gold for gold on a deferred basis. Second, it considers
modern currencies as commodities. Such an opinion could be consid-
ered a very dangerous move, which would open the doors for ribā in
Muslim economies. Third, it draws an analogy between the present case,
namely gold trading on deferred basis, and the opinion taken by Abū
Yousof in the above-mentioned case. However, since it did not discuss
the ʿillah or the cause behind the prohibition of this transaction, then
such an analogy would be discrepant. Even the ʿillah in gold and silver,
as it is understood by the Hanafī school in general, namely the weight,
is unacceptable nowadays with the advent of the banknote which is not
at all weighable. And if these currencies, which are nowadays the sole
medium of exchange and source of value, are not considered ribawi
(involving riba), we would have undermined the very objective of the
sharīʿah in prohibiting the exchange of gold and silver on a deferred
8
al-Kasānī, Badā‘i al-Ṣanā‘i, Dār al-Kitāb al-ʿArabī, Beirut, 2th edition, 1983, pp.
185–190.
9
Bayt al-Tamwīl al-Kuwaitī, al-Fatāwā al-Sharʿiyyah fi al-Masāʿil al-Iqtiṣādiyyah,
Kuwait, 1988, pp. 546–553.
78 chapter three
basis. Unfortunately, some modern Muslim jurists have followed the

Ḥ anafīs and Imāmi’s opinion and concluded that modern paper money
is not ribawi because it is not weighable.10 If we use this line of argu-
ment, we may conclude that it is permissible to trade gold in exchange
of paper money on a deferred basis.
Perhaps one can find an excuse for those who maintained such an
opinion before the end of the convertibility of the dollar with gold, but
no excuse is viable for those who continue to hold such an opinion even
after almost every country around the globe followed the United States
and ended the relation between gold and their respective currencies.
The previous fatwā has been strongly opposed by the sharīʿah adviser
of the Kuwaiti Finance house.11 He argued that gold and silver are
considered by the Lawgiver as mediums of exchange, whether they
are coin, bullion, or in the form of jewelery. Therefore, the rules of
ṣarf of equal for equal and hand to hand should be observed based on
the numerous ḥ adīths reported in this connection, and which did not
make any difference between coin, bullion, and jewelery.12 To cite an
example, it is reported by Abū Said to the effect that the Prophet had
said, “Do not sell gold for gold unless equivalent in weight, and do not
sell a lessor amount for a greater amount or vice versa; and do not sell
gold for silver that is not present at the moment of exchange for gold
or silver that is present.13 In another ḥ adīth it is said, “Gold for gold,
silver for silver, wheat for wheat, barley for barley, date for date, and
salt for salt—like for like, equal for equal, and hand to hand; if these
commodities differ, then you may sell as you wish provided that the
exchange is hand to hand.”14 Commenting on this ḥ adīth, al-Shawkānī
said that the term “gold for gold” includes all kinds of gold, whether
coin, bullion, or jewelery of excellent quality or mixed. Al-Nawawī and
others reported ijmāʿ about this.15
Therefore, the sharīʿah advisor maintains that it is clear that there is no
difference between the different kinds of gold. Concerning the exchange
of these different kinds of gold with paper money, we believe the sharīʿah
adviser added that paper money has the same characteristics as gold
10
Baqir al-Ṣadr, al-Bank al-LaRiawi, p. 173.
11
pp. 546–553.
12
See Abū Dāʾūd, Sunan Abī Dawūd with ʿAwn al-Maʿbūt, vol. 9, p. 198.
13
Mālik Ibn ʾAnas, al-Muwattaʾ, vol. 2, p. 632.
14
Al-Bukhārī, Saḥ īḥ al-Bukhārī, vol. 4, p. 379.
15
al-Shawkānī, Nayl al-Awṭār, Muʾassasat Dār al-Turāth, Cairo, n.d., vol. 5, p. 191.
and silver and has the same rules regarding zakah or exchange for one
another. Thank Allah that the sharīʿah adviser of the Kuwaiti Finance
house had an opinion similar to that of the Board of Great Scholars in
Saudi Arabia. It is reported in resolution no. 10, dated 16/4/ 1393.A.H.
of that Board, “After examining the different opinions of experts of
economics on the subject, the following fatwā was issued: “Considering
the fact that money is everything considered by custom as a medium
of exchange, as it is said by Ibn Taymiyyah, then there is no natural
or legal specification of what should be the medium of exchange. The
acceptance of any medium of exchange depends on custom and usage.
Thus, the dirhams and the dinārs are not desired for their own sake
but because of their ability to serve as a medium of exchange.16 Imām
Mālik is also reported to have said in the Mudawwanah: “If people
used camel skin as a medium of exchange I would see it as unlawful
to exchange it with gold on a deferred basis.”17 Therefore, since paper
money is generally accepted as a medium of exchange and source of
value, and since it is not a certificate which could be refunded by gold,
and given the fact that it is not necessary to be wholly backed by gold
later, the strength or weakness of any currency depends on the economy
of the country of its origin. Therefore, it should be considered in the
same way as gold.
The opinion of Imam Mālik18 and Imām Aḥmad Ibn Ḥ anbal19 that
the ʿillah in gold and silver is muṭlaq al-thamaniyyah (broader concept
of money) seems to be in line with the objective of sahrīʿah, and since
this ʿillah is present in paper money, the Board of Great scholars decided
by a majority that paper money is a thaman and it differs according
to the country of issuance. Therefore, ribā is applicable to these cur-
rencies as it is to gold and silver or others like fulūs (cheap metal or
copper money). It is not permissible to sell them on a deferred basis
or to exchange one kind of it with another with an addition, such as
selling ten Saudi riyāl (paper) for eleven (coin). However, it is permis-
sible to exchange these different currencies if it is hand to hand. Zakah
is obligatory on paper money and it can be made the price for salam
and partnership contracts.
16
Ibn Taymiyyah, Majmūʿ al-Fatāwā, vol. 19, pp. 250–252.
17
Malik Ibn Anas, al-Mudawwanah al-Kubra, vol. 3, p. 90.
18
al-ʿAdawī, Hāshiyat al-ʿAdawī, Dār al-Fikr, edited by Yousouf al-Sheikh, Dār al-
Fikr, Beirut, 1982, vol. 2, p. 45.
19
Ibn Qudāmah, al-Muqnī, vol. 4, p. 5; Ibn Taymiyyah, al-Fatāwā, vol. 29, p. 137.
80 chapter three
Based on the above, the sharīʿah advisor of the Kuwait Finance House
argued, “We are of the opinion that trading gold and silver, whether
bullion or otherwise and whether it is exchanged with paper money,
gold or silver must take place at the place of the contract, determined
according to the custom of the day. Therefore, receiving a cheque could
be considered taking of possession at the time of contract and it is
similar to paper money in circulation and taking possession.
Commenting on the opinion of some commentators on the issue,
the sharīʿah adviser pointed out that some have noted a difference
between the imposition of zakah and the possibility of ribā in paper
money if it is transacted on a deferred basis. They considered paper
money as something that should subjected to zakah but not ribawī.
This is an odd differentiation since paper money should be considered
as gold and, therefore, it should be subjected to zakah and the rules of
taking possession. Otherwise, it should be considered as a commodity
and by consequence not subjected to zakah unless it is used for trade.
This last possibility is unacceptable due to its impacts on zakah and
ribā. It is commonly accepted that people do not keep paper money
for trade but as a medium of exchange for their needed commodities.
They do not consider it as a commodity. Therefore, to consider it as
such would mean it is legitimate to exchange ten dīnārs for eleven and
this is direct ribā.
Pursuing his analysis the sharīʿah advisor said, “Concerning the
status of other metals, the jurists have different opinions as to whether
an analogy with gold could be accurate. The Zāhiri school,20 Osmān
al-Butti, Ibn ʿAqīl from the Ḥ anbali school,21 Qatāda and Tawūs from
the Tabi‘ūn regarded the ʿillah or the rationale to be limited to the
items mentioned in the ḥ adīth. However, we do not need to elaborate
on the different opinions regarding the ʿillah since Muslim jurists are
unanimous that if these metals are exchanged with paper money, there
is no ribā whether nasīa’h (loan) or faḍl (trade). Therefore, it is possible
to sell it at the spot or on a deferred basis if one of the countervalues
is present. Otherwise, it will be bayʿ al-kāliʾ bi al-kāliʾ.”22
20
Ibn Ḥ azm, ʿAlī Ibn Aḥmad, al-Muhallā bi al-ʾĀthār, Dār al-Ma ʿārif al-Jadīdah,
Beirut, vol. 8, 1988, pp. 471–478.
21
Al-Mirdāwī, al-Inṣāf, Dār Iḥyāʾ al-Turāth, Beirut, vol. 5, pp. 131–135.
22
pp. 553–559.
It is clear that even this answer is not convincing with regard to the
issue of gold trading. First of all, the answer is entirely based on the
fatwā of the Board of Leading Scholars in Saudi Arabia, which was
about the issue of considering paper money as a medium of exchange
and source of value like gold. If this is so, then paper money should
fall under the same ruling as gold concerning ribā and zakah and it is
not at all about gold trading. Still, some similarities do exist between
the two issues, but they are not the same. Therefore, a correct conclu-
sion based on the analysis of one of them would not be correct for the
other. Secondly, the sharīʿah advisor raised the issue of ʿillah, but not in
connection to gold, the topic under discussion, but about other metals.
A thorough investigation of the ʿillah of gold may lead to another con-
clusion. Moreover, he mentioned only the opinion of the literalists or
the zāhirī school, who considered the ʿillah to be limited to the items
mentioned in the ḥ adīth. Therefore, paper money could not be consid-
ered as ribawī, which in turn contradicts his conclusion about paper
money based on the view that the ʿillah in gold and silver is mutlaq
al-thamaniyyah (broader concept of money).
The issue was discussed again at the Kuwait Finance House between
Mohammad Abū al-Saud, Aḥmad Bazīʿ al-Yāsin, the president of the
House, and Sheikh Badr al-Mutwallī ʿAbd al-Bāsit. Mohammad Abū
al-Saud maintained that today gold is considered a commodity like any
other commodity and that paper money is considered as legal tender not
because they are backed by gold or silver but because of the authority
of the law. Second, paper money represents the total output of goods
and services produced by the country, and last, people needed it as a
medium of exchange. Therefore, exchanging gold with any kind of these
paper currencies is like any ordinary sale that could be deferred.
Sheikh Badr al-Mutwallī ʿAbd al-Bāsit replied that based on his
personal knowledge, it is necessary that any kind of paper money be
backed by a certain quantity of gold in most countries around the
world. Therefore, the rules regulating ṣarf should be maintained in
its exchange and the taking of possession should be at the time of the
conclusion of the contract.
Aḥmad Bazīʿ al-Yāsin supported Sheikh Badr’s view that paper money
must follow the rule for gold and silver with regard to the issue of
taking possession in exchange and zakat. Otherwise, he argued, this
would open the doors for ribā. Finally, Sheikh Badr pointed out that a
final decision on the subject should be discussed at the level of “lead-
ing scholars” given the complexity of the subject and the diversity of
82 chapter three
opinions on the matter. Therefore, a single scholar could not give a

conclusive ruling on the subject.23
A close look shows again that the discussion concentrated on a part
of the problem, namely, what is the right ruling that should be assigned
to paper money and whether it should be the same as the rulings per-
taining to gold or not.
Almost the same question was addressed to the sharīʿah board of
Faisal Islamic bank of Sudan and the answer was the same concerning
the deferred deal if the agreement is considered as a contract. However,
the board went on to say that if the agreement is considered just a prom-
ise, which would be confirmed later on by a contract, the transaction is
valid; but if the promise was the only agreement, then the transaction
is illegal.24 On the other hand, the board remarked that “it may be said
that gold has lost its characteristic of thamaniyyah or measurement of
value and medium of exchange and has become nowadays a commodity
like wheat and dates. Then why should it not be exchanged with paper
money on a deferred basis as it is the case with wheat and dates? It had
been permissible, from the beginning, to exchange ribawī items such
as wheat and dates with gold when it was a medium of exchange on a
deferred basis. In other words, there was no legal problem in exchang-
ing these ribawī items with the prevailing medium of exchange, which
was gold at that time. Indeed, the issue merits discussion in order to
ascertain if gold had really lost its thamniyyah or measurement of value
and medium of exchange and had become a commodity like any other
commodity. Second, we have to look into the interpretation of Ubādah
Ibn al-Sāmit’s ḥ adīth, “If these commodities differ, then you may sell
as you wish, provided that the exchange is hand to hand.” The literal
interpretation of this ḥ adīth shows that it is not permissible to trade any
of these six mentioned items if they differ, unless it is hand to hand.
This means it is not permissible to exchange wheat or dates with gold
on a deferred basis. Nonetheless, Muslim scholars are unanimous that
it is legal to do so.
Therefore, is it possible for contemporary Muslims jurists to con-
clude that it is permissible to exchange gold with dollars, for instance,
on a forward basis because the dollar has replaced gold as a medium
23
Ibid., pp. 559–560.
24
Fisal Islamic Bank of Sudan, Fatāwā Haiʾat al-Raqābah al-Sharʾiyyah Li-bank Faisal
al-Islāmī al-Sudānī, pp. 95–97.
of exchange and gold has become a commodity like wheat or dates,

although it is still a ribawī item? The issue needs considerable research
and attention and we believe that it should be discussed by the respec-
tive sharīʿah boards of Islamic banks and financial institutions and then
by the supreme sharīʿah board for a collective decision. However, until
this decision is issued, the board relies only on the literal meaning of
the ḥ adīth in its present fatwā as it is explained above.25
Based on the different arguments discussed above and the contradic-
tory interpretations, the present study will attempt to address this issue.
First of all, it should be noted that there is no specific sharīʿah provision
on what the medium of exchange should be as we already mentioned
in Ibn Taymiyyah’s statement. Moreover, there is no specific provision
in the Qurʾān or the sunnah that would make it incumbent upon the
Muslim Ummah to use continually the bimetallic standard of gold and
silver, prevailing in early Islamic history. This is clearly demonstrated
by the fact that ʿUmar, the second Caliph, once thought of introducing
camel skin coins. This would have been in the nature of fiduciary money,
which is equivalent to the now-prevailing paper money. However, the
problem that might have perplexed him was probably the control of its
issuance when he was advised by experts that it would be impossible to
do this and it might not only lead to excessive creation of money but
also the disappearance of camels through their excessive slaughter. He
then abandoned the idea. The idea has also been generally reflected in
the writing of a number of prominent Muslim jurists. We have already
mentioned above the opinion of Imam Mālik and Ibn Taymiyyah. Also
Aḥmad Ibn Ḥ anbal is reported to have said that there is no harm in
adopting as currency anything that is generally accepted by people.26
Ibn Ḥ azm also did not find any reason for Muslims to confine their
currency to gold or silver.27
However, the issue under discussion, namely, gold trading with paper
money on a deferred basis, cannot be resolved unless we explore briefly
the ʿillah for which the shariʿah has prohibited the exchange of gold
and silver, unless they are of equal measurement, quality, and delivered
hand to hand.
25
Ibid., p. 98.
26
al-Ruhaibānī, Matālib ulī al-Nuhā fi Sharḥ Ghāyat al-Muntahā, vol. 3, p. 181.
27
Ibn Ḥ azm, al-Muḥ allā bi al-Āthār, vol. 5, p. 351.
84 chapter three
The ʿIllah behind Trading Gold unless Its Hand to Hand
Despite the fact that almost all Muslim schools except the Zahirī school
used analogy to widen the scope of ribā in gold and silver, they often
dissented when it came to the practical interpretation of the ḥ adīth.
Thus, the Zahirī school, as a result of their rejection of analogy (qiyās)
as a way of determining the law, assumed that the prohibition of ribā
applies only to the six articles quoted in the ḥ adīth (gold, silver, wheat,
barley, dates and salt). Therefore, it cannot be extended by way of analogy
to other articles.28 A direct consequence of this opinion was that paper
money would not be considered as having the characteristic of gold and
silver as mentioned in the ḥ adīth. Therefore, it is legal to exchange them
with paper money on a deferred basis. It seems that the International
Association of Islamic banks has adopted a similar interpretation in its
opinion as quoted above. We have already mentioned its shortcomings
and their grave consequences on ribā and zakah.29
For the Ḥ anafīs the ʿillah is that they are weighed articles when they
are exchanged.30 This opinion has also been attributed to Imām Aḥmad
Ibn Ḥ anbal as one version of his opinion.31 On the other hand, for the
Mālikīs, Shaf ʿīis and a second version of Imam Aḥmad’s opinion, the
ʿillah in gold and silver is that they are currency (athmān). However,
some of them considered the ʿillah here as totally restricted to gold and
silver and could not be extended to any other thing (ʿillah qāsirah).
The last opinion was reported from some Mālikīs32 and Ḥ anbalīs33 who
maintained that the ʿillah in gold and silver is that they are currency
(athmān). A similar analysis was also reported from Mohammad Ibn
al-Ḥ assan al-Shaibānī in his discussion of the possibility of ribā in fulūs.34
28
Ibid., vol. 5, p. 355.
29
See also ʿAli al-Sālūs, Al-Nuqūd wa Istibdāl al-ʿUmlāt, Maktabat al-Falaḥ, Kuwait,
1985. ʿAli al-Sālūs elaborated on this in his argument and counterargument with Ḥ assan
Ayyoub. While Sālūs maintains that the ʿillah is mutalq al-thamaniyyah, Ḥ asan Ayyoub
is of the opinion that the ʿillah is restricted to the six items mentioned in the ḥ adīth;
therefore, there is no ribā in the exchange of papers currencies on a deferred basis
because they are commodities.
30
Al-Sarakhsī, al-Mabṣūṭ, vol. 12, pp. 167–8.
31
Ibn Qudāmā, al-Mughnī, vol. 4, p. 125.
32
Imām Mālik, Al-Mudawwanah, vol. 3, pp. 395–396.
33
Ibn Qudāmah, al-Mugnī maʾal-Sharḥ al-Kabīr, vol. 4, p. 126. Ibn Taymiyyah,
Majmūʾ al-Fatāwā, vol. 29, pp. 251–252.
34
See al-Sharakhsī, al-Mabṣūt, vol. 194.
Moreover, this ʿillah could be extended to any other object, which has
become a medium of exchange (mutlaq al-thamaniyyah).35
However, to consider the rationale (or unique feature) prohibiting
ribā in gold and silver to be the weight is somehow inconsistent. For
instance, it is agreed among all scholars that it is permissible to make a
salam contract in exchange for other weighable items. Therefore, if we
consider gold and silver as weighable items, we would be exchanging
weighable with each other on a deferred basis, which would undermine
the very objective of the ʿillah itself. Moreover, if we look to the wisdom
behind the prohibition of ribā, it could be said that it is more appar-
ent, nowadays, in paper money than it is in gold, although it is not a
weighable item.36 However, some Ḥ anbalīs who adopted this view argue
that other weighable items are accepted in salam without ribā by way
of necessity. The weakness of this argument is clear.37 The Ḥ anafīs for
their part, argued that gold is weighed on scales while other weighable
items are measured by the steelyard.38 This argument is even weaker
than the first one.
On the other hand, there is greater consistency in the argument of
those who consider thamaniyyah as the ratio or important feature in
gold and silver. However, they too have differed among themselves as
we have mentioned before. Some considered it qhalabat al-thamaniyyah
which means the thamaniyyah in gold and silver occurs by nature or
creation (bi al-khilqah). In other words, these two commodities are by
creation the only medium of exchange and should remain so. Moreover,
no other item could be given these characteristics.39 A direct implication
of this opinion is that they have classified money into natural money
(naqd bi al-khilqah) and conventional money (naqd Iṣtilāḥ ī). The former
represents bullion money because, as they argued, gold and silver were
created by Allah to act as the price. The latter, namely, conventional
money, represents all forms of money whether made of inferior metal
35
See al Shawkānī, Nayl al-Awtār Sharḥ Muntaqā al-Akhbār Min A ḥ adīth Sayyid
al-Akhyār, Cairo, al-Bābī al-Ḥ alabī, vol. 5, p. 220.
36
For more detail, see ʿAbd Allāh Ibn Manī, “al-Waraq al-Naqdī Ḥ aqiqatan wa
Ḥ ukman,” Buḥ ūth fi al-Iqtiṣad al-Islāmi, Saudi Arabia, Idārat al-Thaqāfa wa al-Nashr,
Jāmiʿat al-Imām Mohammad Ibn Saʿūd al-Islāmiyyah, 1989, pp. 59–107.
37
See Ibn Qudāmah, al-Muqhnī, vol. 4, p. 4.
38
See al-Kasānī, Badāii al-Sanāi, vol. 5, p. 186.
39
Al-Bājī, al-Muntaqā Sharḥ Muwatāʾ al-Imām Mālik, vol. 4, p. 258; al-Ghazālī, Ihyāʾ
ʿUlūm al-Dīn, vol. 4; p. 96; al-Nawawī, al-Majmūʿ Sharḥ al-Muhazzab, vol. 9, p. 443.
86 chapter three
or paper or any other commodity. The former is money par excellence;

the latter is only taken as money.
This classification has, in fact, led to two conflicting conclusions.
For some jurists, nonbullion money like fulūs (cheap metal or cop-
per money) is not to be treated as real money having a natural value.
Consequently, any excess in exchange of fulūs whether on the spot or
in deferred payment does not fall under the purview of prohibited ribā
and they are not subject to zakah.40 If we apply this argument to paper
money in exchange for gold, on a deferred basis, there will be no legal
problem. However, this opinion is based totally on the reverse of the
reality of our modern times, where paper money is the sole medium
of exchange and store of value, while nobody uses gold as a medium of
exchange. Moreover, to consider these different kinds of paper money
as non-ribawī items would open the doors to ribā and undermine the
objective of the shariʿah.
However, the second group of those who considered the ʿillah to be
al-thamaniyyah maintained that it is mutlaq al-thamaniyyah, which
means that whatever item is considered as a medium of exchange by
custom and widely used by people for that purpose will be a ribāwī
(related to riba) item. This opinion was reported from the different
schools of Islamic law and vigorously defended by Ibn Tamiyyah and Ibn
Qayyim.41 Pursuing the same line of argument Ibn Tamiyyah and Ibn
Qayyim maintained that even jewelry made of gold and silver could be
exchanged on a deferred basis. This is because it is no longer athmān or
a price or medium of exchange but rather a kind of commodity. Some
modern Muslim commentators have also defended this stand. Thus,
Sa‘dī Abū Jayb argues that it is custom that has given gold and silver
the characteristic of being the medium of exchange and it is the same
custom that has deprived them of this characteristic and replaced them
with paper money. Even the gold and silver coins used previously as
the medium of exchange are no longer used as such and they could be
transformed into jewelry without any legal problem ensuing.42
40
Nazīh Ḥ ammād, “Taqhawwur al Nuqūd wa Atharuhu ʿalā al-Duwūn fi al-Fiqh
al-Islāmī,” Majalat al-Baḥ th al-ʿIlmī, Jeddah, vol. 3, 1980; Hasnuz Zaman, Indexation of
Financial Assets: An Islamic Evaluation, The International Institute of Islamic Thought,
Islamabad, 1993, p. 49.
41
See Ibn Rushd, Bidāyat al-Mujtahid wa Nihāyat al-Muqtaṣid, vol. 2, p. 97; Ibn
Qayyim al-Jawziyyah, ʿIlām al Muwaqqiʾn an Rab al-Ālamin, vol. 2, p. 156; Ibn Taymiyyah,
Majmūʿ al-Fatāwā, vol. 29, p. 472.
42
Saʿdī Abū Jayb, Bayʿ al-Ḥ ulii fi al-Sharīʿah, Dār al-Fikr al-Muʿāsir, Beirut, 1994,
pp. 3–18.
More importantly, the prohibition on exchanging gold or silver on

a deferred basis is not because it is gold or silver but because they are
the price and medium of exchange. But when they are in the form of
jewelry, they no longer represent a price. Therefore, their exchange could
be transacted on a deferred basis.
The Effect of the ʿIllah in Gold to

Its Trade on a Forward Basis
The question here is that if paper money is the sole medium of exchange
recognized by people around the globe, and if the consistent ʿillah behind
the trade of gold and silver on a deferred basis no longer exists nowa-
days, and considering the fact that one of the well-recognized Islamic
jurisprudential principles is that the existence of any rule is subject to
the existence of its cause or ʿillah (al-ḥ ukmu yadūru maʿ illatihi wujūdan
wa ʿadaman), what would be the position of gold and silver? Moreover,
if we consider the argument advanced by Ibn Taymiyyah and his disciple
Ibn Qayyim with regard to the permissibility of exchanging jewelery
on a deferred basis since it is no longer a medium of exchange, and
the opinion that fulūs are ribawī items because they are athmān, one
could say that the logic and legal arguments advanced in favor of the
permissibility of selling gold and silver today on a deferred basis
require strong argument and evidences in order to be overruled. We
have already explained the weaknesses of the different kinds of ʿillah
advanced by the different schools and their result of opening the doors
to ribā, except for the opinion that the ʿillah is mutlaq al-thamaniyyah.
We could say that the prohibition against selling gold and silver on a
deferred basis is not because they are gold or silver but because they are
athmān, or the medium of exchange and whatever the custom considers
it must be, so that it should be treated as thaman. On the other hand,
the reality is that neither gold nor silver is thaman nowadays, and the
Islamic principles are clear with regard to a specific rule if its ʿillah is
no longer in existence.
Despite this reality and the legal argument advanced, the views of some
commentators raise concern. Saleh al-Marzūqī argued, for instance:
The use of paper money is well established in the Muslim world and has
become the only medium of exchange or almost so, because it possesses
the ʿillah behind the prohibition to transact gold and silver on deferred
bases, which is thammaniyyah as recognized by the Fiqh Academies and
the Council of Great Scholars in Saudi Arabia and accepted by most
88 chapter three
contemporary Muslim jurists. Despite the fact that the use of gold as
a medium of exchange has totally disappeared except in limited cir-
cumstances, some countries have even prohibited its use as a medium
of exchange and the fact that bullion gold is traded as commodity, the
thamaniyyah in the old golden dīnār will remain and must remain so until
the day of judgment. In addition, the appearance of paper money nowa-
days, or another medium of exchange in the future, will not change the
thamaniyyah in gold whether it is in the form of dinār, bullion, jewelery
or raw gold because the sunnah makes it an obligation that it should not
be traded unless of equal measurement and exchanged hand to hand. It
is the basis (ʿasl ) on which other items will be considered by analogy.”43
It is clear from this argument that al-Marzūqī was of the opinion that
gold and silver are athmān by creation or by nature, which means gold
and silver will remain athmān even if they lose their characteristic of
being the medium of exchange or athmān in real life. They must remain
as athmān because they are so by nature. However, despite the fact that
some classical scholars have argued that gold and silver are athmān by
nature and that this opinion has been endorsed by some contempo-
rary writers, we have not come across the legal basis for this opinion
in the Qurʾān or the sunnah. Therefore, to our knowledge, there is no
such basis except ijtihād (endeavour of a jurist to derive a rule). And
if it is merely an ijtihād we are not under any obligation to follow it,
especially when it contradicts another kind of ijtihād that seems to be
more rational and consistent. It should be noted that Salamah Jabar,
one of the advocates of the view that gold and silver are currencies by
creation, quoted a ḥ adīth44 to justify his claim. The ḥ adīth is reported in
al-Tabarānī to the effect that “gold and silver are the stamp of God on
earth and whoever brings this stamp will get his need fulfilled.”45 How-
ever, this is a weak ḥ adīth46 and could not be accepted as an argument
on the issue. Moreover, even the meaning seems to have no connection
with the claim that gold is money by creation. It is well recognized that
aḥ kām or Islamic rules in the area of muʿamalāt (commercial transac-
43
Saleh al-Marzūqī “Tijārat al-Zahab fi Aham Ṣuwarihā wa Aḥkamihā,” Majallat
Majmaʾ al-Fiqh al-Islāmī, ninth session, no. 9, vol. 1, 1996, pp. 152–153.
44
Moḥammad Salāmah Jabar, ʾAḥ kām al-Nuqūd fi al-Sharīʿah al-Islāmiyyah, Maktabat
al-Ṣaḥwah al-Islāmiyyah, Kuwait, 1995, p. 111.
45
Al-danānir wa al-darāhim khawātīm Allāh fi ʿardihi faman jāaʾ bi khatami mawlāh
quḍiyat hājatuhtu.
46
See al-Manāwi, Mohammad ʿAbd al-Rauf, Fayd al-Qadīr Sharḥ al-Jāmiʾ al-Ṣaghīr
min Aḥ ādith al-Bashīr al-Nazir, Dār al-Kutub al-ʿIlmiyyah Beirut, Lebanon, 1994, vol. 3,
p. 726, ḥ adīth no. 4268. Al-Haithami said one of the reporters of this ḥ adīth is Aḥmad
Ibn Mohammad Ibn Mālik Ibn Anās. He is not a reliable person (daʾif ). Al-Zahabī
said this is a weak ḥ adīth. Ibid.
tions) are based on reason or taʾlīl. To claim that the thamaniyyah in

gold and silver is natural or by creation is to contradict this principle
without real evidence.
Another commentator who shares the view of al-Marzūqī is Sāmī
Ḥ ammoud. He stated that
No consideration shall be given to the opinion that the status of gold
and silver has changed from being medium of exchange to merely com-
modities. Our response is that, any issue in Islamic law, the rule of which
has been stated in the text, would not change even if the circumstances
change. Thus, gold and silver are still maintaining their status of thamani-
yyah although they are not used nowadays as a medium of exchange. The
Prophet (PBUH) made no distinction between bullion and gold coin at
the expedition of Khaibar and there is no consideration to the change of
use of these items. And no one could argue that we (people in the Middle
East or Jordan) are no longer eating wheat and people in East Asia are not
eating wheat but rice, then wheat is no longer a ribawī item and could
be exchanged on a deferred basis. This is an important point for those
who are thinking to be involved in the international markets and trade
on forward and futures basis in gold, silver, currencies and commodities,
which are ribawī on forward and future basis.47
It seems that this argument is based on the assumption that the prohibi-
tion of trade in these items on a deferred basis is not based on any ʿillah,
as it is claimed by the Zahiri School or the opinion that gold and silver
are athmān by creation. Then they will remain so even if they are no
longer athmān in real life. We have already pointed out the shortcom-
ings of this argument. Furthermore, the changes of circumstances do
have an effect if the ʿillah is no longer in existence. If we consider the
prohibition of these items to be based on ʿillah, then rice will take the
rules of wheat with regard to ribā. It is an edible food commodity and
can be conserved therefore, the argument advanced by Ḥ ammoud in
this regard has no place in our discussion. In addition, if wheat were
not used in some part of the world or a specific community ceased to
use it, this would not mean that it is not in use in all parts of the world.
Many people are still using wheat, which is not the case with gold, as
it has totally disappeared as a medium of exchange.
To sum up our discussion on gold and the possibility of selling it on
a deferred basis, one can say if gold and silver are no longer athmān, as
it is argued by many, then, does their rules about ṣarf in particular shall
47
Sāmī Ḥ assan Aḥmad Ḥ ammoud, “ ʿAmal al-Ṣarf wa Tabādul al-ʿUmulāt wa
ʾAḥkamuha fi al-Fiqh al-Islāmi”, ʾAbḥ āth al-Muʾtamar al-Thānī li al-Maṣrif al-Islāmī,
Kuwait, 1983, p. 111.
90 chapter three
be maintained and on any grounds be maintained. This is because many

scholars such as al-Kāsānī define ṣarf as “the exchange of athmān with
each other.”48 Therefore, does this mean if gold and silver are exchanged
with paper money the transaction is not a ṣarf transaction? However,
if they are exchanged with each other, it should be hand to hand as it
is a case of sarf. Similarly, with reference to other items mentioned in
the ḥadīth, such as wheat and dates, which could be exchanged with
currency on a deferred basis without any legal problem, they could not
be exchanged with each other unless it is hand to hand.
It is noteworthy nevertheless that despite the result of the above
analysis, we could not claim that our conclusion is a final one. However,
given the fact that the issue is of great importance to Muslim investors
and more importantly in establishing a clear concept of money in Islamic
modern Islamic economy, the issue needs to be investigated urgently. We
have attempted to tackle the issue, nonetheless. Due to the sensitivity
and complexity of the issue, a single study may not be enough to reach
a final conclusion and a collective effort is needed. On the other hand,
the above conclusion and arguments will be maintained if in practical
life gold has really lost its characteristic of thamaniyyah. Yet, this will
be a practical and economic dimension of the problem and not a legal
one. Therefore, if gold is still a de facto thaman as it is maintained by
some Muslim economists, the exchange of gold or silver with paper
money should be hand to hand.
From a practical point of view, and despite the general view that
gold is no longer apparently a medium of exchange and store of value
nowadays, some Muslim economists are still maintaining that gold has
not totally lost these characteristics. Thus, El-Gārī49 argued in favor of
the indexation of debt using gold rather than other instruments: “Many
people believe that gold nowadays is just a commodity like any other
without any special characteristic. Therefore, its relation with currencies
is similar to the relation of any other commodity, such as petroleum,
wheat, or any other commodity traded in the international market.
Moreover, the time when gold is considered as a currency is already
over and the attachment of some people to gold in this area is no more
than an emotional feeling.” However, this is not completely correct.50
48
al-Kāsānī, Badāi al-Ṣanāi fi Tartīb al-Sharāii, vol. 7, p. 3181.
49
Mohammad Ali El-Gārī, “Kasād al-Nuqūd al-Waraqiyyah wa ʿInqitāʾihā wa
Ghalāʾihā wa Rakhaṣihā wa ʿAtharu zālika fi Taʿyīn al-Ḥ uqūq,” Majallat Majmaʿ al-Fiqh
al-Islāmī, no. 9, vol. 2, pp. 694–697.
50
Ibid.
1. Gold is still the origin of many currencies and they gained accep-
tance and circulation because of it, although this relation is no longer
obvious. However, gold still has its special position and nature that
differentiate it from other commodities. It is still more closely related
to currencies than to other consumable or industrial commodities.
For instance, people used gold as a medium of exchange 3000 years
ago and it remained so in one way or another until 1971 when the
United States ended the convertibility of the dollar to gold. Despite
this fact, gold remains the best measurement of value, albeit in an
indirect way, in contemporary transactions. Measurement of value in
particular is still based on the gold system as it is explained below:
• The price of one ounce of gold was thirty-five dollars when the
United States moved out of the gold system. Today, this price has
increased tenfold. It is now 350 dollars per ounce. However, what
attracts attention is that other financial indices have increased to
this level, namely, ten times. Thus, the public debt in the United
States has increased ten times, as well as the cost of the public
debt, or the rate of real interest etc. All this shows that gold is still
in reality the “currency by creation.”
• The strongest currencies in the world today are those that have
been able to have a stable relation with gold despite the absence
of an official relation between gold and these currencies. For
instance, Japan is always eager to maintain stable relations between
gold and the Yen. For that reason the price of gold has increased
three times vis-à-vis the Yen since 1971. Moreover, the Japanese
monetary policy is based on the maintenance of a stable relation
between the Yen and gold.
• Gold is still the best indicator of price movements in the
future . . . and the United States has been able to establish a stable
price movement after the adoption by the Federal Reserve System
of gold as the base of monetary policy.
2. Many experts, especially those associated with the Federal Reserve,
believe that a stable monetary policy cannot be realized unless the
major currencies around the world are related to gold in one way
or another. Even the Federal Reserve chairman has also backed this
opinion. All these facts show that gold is the “natural currency.”
3. Most banking legislation around the world prevents banks from
trading in commodities like wheat, oil, phosphate, aluminium etc.,
because banking activities are limited to currency trading. However,
this legislation includes gold in the category of currencies and allows
banks to invest in them.
92 chapter three
4. Gold has special characteristics compared to other indicators or

commodities. Other commodities may be extinguished through
consumption and their supply is based on today’s consumption,
while the supply of yesterday has already been consumed. This is not
the case with gold where today’s supply is the supply of gold avail-
able on earth since man discovered gold. Since the supply of gold is
always increasing, this will result in its greater independence from
the control of a specific body.
5. The world production of gold will not add to the existing quantity by
more than two percent annually. This means a stable supply of gold,
which consequently, means the stability of the currencies backed by
gold. This is not the case with paper money, where the governments
and banks can create unlimited amounts of money.51
It is clear from this analysis that in El-Gārī’s view gold is currency by

nature or by creation. However, as we have already mentioned, although
some classical Muslim jurists have opted for this opinion, there are no
reliable legal grounds for it. If gold is currency by creation, is it per-
missible for Muslims, especially in modern times, to use other items as
currency and reject gold? If the answer is positive, then, the opinion that
gold is currency by creation is of no legal effect. However, if the answer
is negative, then, the Muslim Ummah (the Muslim community) would be
committing a sin by rejecting the use of gold. But such a conclusion has
never been articulated nor supported by any Muslim jurist. Moreover,
gold and silver are not used by any community around the world as
medium of exchange to purchase valuable or non-valuable goods.
Therefore, we can maintain that gold and silver have been mentioned
by the sharīʿah texts just because they were the currencies in use at that
time. Moreover, the assertion that gold is currency by creation is not
sustained by historical evidence as many nations throughout history have
stopped using it for that purpose. Further, these arguments advanced by
al-Gārī would be totally correct if they could also be applied to silver,
the other metal used at the time of the Prophet (PBUH) as a medium
of exchange and explicitly mentioned in the ḥ adīth. Moreover, the two
metals have the same rules throughout Muslim legal history and there-
fore, if they are by creation currencies, they should remain so together
or disappear together. But if they are not currencies by creation, we
could say they were the medium of exchange during the time of the
51
Ibid.
Prophet (PBUH) because the custom was so at that time. Later on,
silver lost this characteristic and gold has become the sole medium of
exchange and store of value and now this too has been totally replaced
by paper money. Therefore, the determining factor in the issue is the
custom and whatever item is used by people as currency. There is thus
nothing special in the substance of dirham and dinār, as Ibn Taymiyyah
has explained.
Ibn Manī’, a contemporary jurist who has written widely on the
subject of currencies and gold and is a member of the different Islamic
Fiqh Academies, said in his rebutal of the claim that gold and silver are
money by creation:
We have doubt about the reliability of the opinion that gold and silver are
money by creation. This doubt will be more apparent when we survey the
history of money, which reveals that people had different kinds of money
before gold. The concept of money is a subjective concept. It could vary
according to government policies and according to custom and practice.
Therefore, the opinion that gold and silver are money by creation is just
an opinion, which has no grounds either from legal, or linguistic or his-
torical perspectives. However, this does not deny the fact that it has more
characteristic of thamaniyyah than any other item.52
Given the above argument and counterargument and the confusion
whether gold has lost its characteristic of thamaniyyah or not and
despite the conviction that gold is not currency by creation, the pres-
ent study is somehow reluctant to give a final verdict on the issue due
to the practice of certain developed countries having policies totally
related to gold or the international practice of allowing banks to trade
in gold although, in principle, their area is limited to currencies. This
may shadow the stand that gold has totally lost its characteristic of
thamaniyyah. However, a temporary solution to the issue of trading
gold on a deferred basis will be the idea of non-binding mutual prom-
ise to exchange gold with paper money at the spot price followed by
a contract to confirm it at the time of delivery based on the argument
that gold is still money and thaman. The idea will be elaborated in the
next chapter because it is generally discussed as one of the alternative
for risk management of currency.
However, if the controversy about trading gold on a deferred basis
is still debated, what is the Islamic position on trading currencies on a
forward basis? This is what will be discussed next.
52
ʿAbd Allāh Ibn Manīʾ, “Al-Zahab fi Baʾḍi Khaṣāʾiṣihi wa Aḥkamihi,” Majallat
Majmaʿ al-Fiqh al-Islāmī, 1996, no. 9, vol. 1, p. 76.
CHAPTER FOUR
THE FORWARD MARKET FOR CURRENCIES
Basic Rules of Currency Exchange and Paper Money
Before starting our discussion on the legality of forward currency

markets in Islamic law, it is necessary to establish the legal status of
modern currencies in Islamic law. Do they invoke the rules of gold and
silver as the medium of exchange and source of value or they are like
fulūs (cheap metal or copper money) known to early Muslim jurists
or something totally different? The issue has been discussed in several
forums such as that of the Islamic Fiqh Academy based in Makkah, the
Board of Great Scholars in Saudi Arabia, and the Islamic Fiqh Academy
based in Jeddah.1 Each institution has passed a resolution on the subject.
However, one of these resolutions may be enough to clarify the issue
since there is a great similarity between these different resolutions. The
major points of the resolution adopted by the Islamic Fiqh Academy
based in Makkah were as follows:
1. Considering that gold and silver were the principle medium of

exchange, and the ʿillah of ribā in these two metals was mutlaq al-
thamaniyyah (the broader characteristic of being money) or money
and the medium of exchange, then according to the most authorita-
tive opinion of Muslim jurists, this ʿillah is not restricted to these
two metals, although they represented the principle source. On the
other hand, considering that paper money has become thaman and
replaced gold and silver in their use today, it is through these cur-
rencies that the value of things is measured after the disappearance
of the gold and silver standards. Moreover, people rely on and keep
paper money as a store of value. Debt is settled by these currencies,
despite the fact that their values are not intrinsic but based on their
acceptance as medium of exchange; by this characteristic they become
a thaman. Considering the fact that the ʿillah in gold and silver is the
1
See Majmaʿ al-Fiqh al-Islāmī, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 3, vol. 3,
p. 165. Resolution no. 21 (9/3).
the forward market for currencies 95
thamaniyyah, which is also present in paper currency, the Academy

decided that paper money is an independent kind of medium of
exchange. It has the rules of gold and silver concerning zakah, ribā
al-faḍl (riba related to trade and ribā al- nasīaʾh (related to loan) as it
is in gold and silver by way of analogy based on thamaniyyah. Thus,
paper money will follow all rules related to gold and silver regarding
sharīʿah obligations.
2. Paper money is considered an independent kind of currency as is
the case with gold and silver. These different currencies should be
considered as different types of currencies according to the country of
issuance. In other words, the Saudi currency is a kind ( jins) and the
American currency is another kind ( jins) and so on. Therefore,
• Ribā, whether faḍl or nasīaʾh, applies to these currencies as it does
to gold and silver. Consequently, it is illegal to buy and sell these
currencies in exchange for one another or for gold and silver on a
deferred basis without taking possession at the time of the contract.
• It is illegal to exchange the different tenders of any of these cur-
rencies with each other whether in a spot market or on a deferred
basis. For instance, it is illegal to sell ten Saudi riyal for eleven on
the spot or on a deferred basis.
• It is legal to exchange these currencies if the transaction is
conducted on the spot. For instance, it is legal to exchange two
Lebanese lira with two Saudi riyal or more or less or an American
dollar with three Saudi riyal or more or less if it is hand to hand.
Also, it is legal to exchange three Saudi paper riyal with three
Saudi silver riyal or more or less, if it is on the spot, because they
are not from the same kind ( jins).
3. Zakah the amount payable by a Muslim on his net worth as a part
of his religious obligations, mainly for the benefit of the poor and
the needy) on paper money is obligatory if its value reaches the
amount prescribed by the sharīʿah for silver and gold. But it should
be based on any cheaper price of the two metals. If there are some
commodities for trade, besides gold or silver, it should also be added
as subject of zakat.
4. It is legal to use paper money as a price for salam and capital for
partnership.2
2
See Qarārāt Majlis al-Majmaʿ al-Fiqhī al-Islāmī, Makkah 8 to 16, Rabi al-Ākhir,
1402, Fifth Session, pp. 96–97.
96 chapter four
Thus, the spot currency exchange is unanimously agreed upon among

Muslim jurists as a legal one. The majority of contemporary Muslim
jurists, on the other hand, consider the forward exchange as illegal.
This is also the position of the major Islamic institutions interested in
Islamic commercial law. However, some scholars have argued for its
legality by drawing an analogy with fulūs or by considering the concept
of ṣarf (currency exchange) as just limited to gold and silver. This last
opinion seems to be based on shaky grounds, given the fact that the
difference between fulūs and paper money is obvious.
Nevertheless, Muslim investors may sometimes be in need of such
transactions to manage risk associated with currency fluctuations. Is
it possible to modify the existing forward currency market and bring
it in line with sharīʿah principles? If this is not possible, what is the
alternative?
It is indispensable for business managers today to know how the
foreign exchange markets work and the ways in which currency risk
can be reduced. Changes in the relative value of various currencies can
disrupt the planning of firms engaged in the export or import business.
Of course, the problem of fluctuating currency values is not so serious
if the payment for goods, services, or securities is made promptly. Spot
market prices of foreign currencies normally change very little from
day to day. However, if payment is to be made weeks or months in the
future, there is considerable uncertainty as to what the spot rate will
be for any given currency on any given date. When substantial sums
of money are involved, the rational investor or commercial trader tries
to guarantee the future price at which currency can be purchased. This
is the function of the forward exchange market that reduces the risk
associated with the future purchase and delivery of foreign currency
by agreeing upon a price in advance.3
A forward exchange rate contract is a contract to buy and sell a
specified amount of different currencies for physical delivery of either
side at some future date, calculated by reference to a contractually
agreed strike price.4 It is a tool that is used not only by borrowers, but
also by traders who typically deal with foreign currency when import-
ing or exporting their products. However, Muslim jurists are almost
3
Peter S. Rose, Money and Capital Market—The Financial System in the Economy,
Business Publications, 1986, pp. 790–791.
4
John Prebbe (ed.), Dimensions in Banking and Foreign Exchange Law, Wellington,
Butterworths, 1992, p. 222.
unanimous in agreeing that it is illegal to exchange currency if it does

not involve immediate receipt or taking of possession, as we have men-
tioned before. Thus, al-Subkī said: “All scholars from whom we have
learned are unanimous that any mutual exchange without immediate
reciprocal taking of possession is void.” Ibn al-Munzir reported the
ijmāʿ about it.5
Moreover, similar provisions have been adopted by the Egyptian
and Sudanese Islamic banks.6 In addition, a general stand about such
transactions was taken in the second conference of Islamic banks held
in Kuwait. It was clearly stated that “It is illegal to exchange gold, silver
or currencies unless it is on the spot. Therefore, any exchange on future
basis will be a kind of ribā.”7 Furthermore, the Islamic fiqh Academy
held a similar position, in its resolution no. 64/1/7 concerning Stock
Markets adopted in its seventh session held in Jeddah.
The Accounting and Auditing Organization of Islamic Financial
Institutions’s standard no. 1 on Trading in currencies is very explicit:
It is prohibited to enter into forward currency contracts. This rule applies
whether such contracts are effected through the exchange of deferred
transfers of debt or through the execution of a deferred contract in which
the concurrent possession of both of the countervalues by both parties
does not take place.8
It is also prohibited to deal in the forward currency market even if the
purpose is hedging to avoid a loss of profit on a particular transaction
effected in a currency whose value is expected to decline.
This prohibitive stand on the illegality of the forward contract in
currency exchange is also maintained in the case of deferring one of
the countervalues while the second is presented at the spot as in the
case of salam in commodities. Several aḥ adīth are explicit on the issue,
such as “Exchange of gold for gold, silver for silver, wheat for wheat,
oats for oats, dates for dates and salt with salt must be on the spot
and in equal quantities, but if the two kinds [of commodities] differ,
exchange them as you like, but the exchange must be completed on the
5
Ibn al-Munzir, al-Ijmāʿ, p. 97.
6
Sudin Haron and Bala Shanmugam, Islamic Banking System Concept and Applica-
tion, p. 139.
7
See ʾAbḥ āth al-Muʾtamar al-Thānī li al-Maṣrif al-Islāmī, Kuwait, 1983, p. 131.
8
Accounting and Auditing Organization for Islamic financial institutions, Sharīʿa
Standards 2004–5, Standard no. 1 Trading in Currencies, p. 5.
98 chapter four
spot and no credit must be involved.”9 Moreover, there is a consensus

among Muslim jurists that such a transaction is not allowed in Islam in
the exchange of gold and silver. However, some differences have been
reported concerning fulūs. These differences are based on the different
opinions about the ʿillah or the rationale of gold and silver as explained
above. Thus, some classical scholars are of the opinion that it is legal to
exchange fulūs in the contract of salam.10 What concerns us more here
is the opinion of some modern jurists who seem to have extended the
application of this opinion to paper money.11
However, as we have indicated above, the idea of considering fulūs
commodities and non-ribawī items is based on the assumption that
the ʿillah in gold and silver is weight (wazn) or thamaniyyah qāṣirah,
which could not be extended to items other than gold and silver. We
have already demonstrated the weakness of this argument. Moreover,
we may find some excuses for the classical scholars in connection with
this issue. First of all, at that time, gold and silver were still the major
medium of exchange while today they have been totally replaced by
paper money. Second, fulūs are used only in the sale and purchase of
minor items, which is not the case with modern currencies. In other
words, fulūs did not possess at that time, according to the proponents
of this view, the characteristics of money or thamaniyyah in full and
were hardly used as a store of value or unit of account and were more
in the nature of a commodity. Hence, there was no restriction on their
purchase on a deferred basis as is the case with gold and silver. Based
on this argument, it is reported from different scholars belonging to
the different Islamic schools of law that it is not possible to use fulūs
as capital in muḍārabah,12 (a contract between a capital owner and an
investment manager to share profit) but this is not the case with paper
money, which is nowadays the sole medium of exchange.
9
Muslim, Saḥ iḥ Muslim with Sharḥ al-Nawawī, Mu’assasat Manāhil al-‘Irfān, Beirut,
1986, vol. 11, p. 37; see also Fatḥ al-BārīBi Sharh Saḥ īḥ al-Bukhāri, Dār Iḥyāʾ al-Turāth,
vol. 4, p. 304.
10
See, for instance, Ibn al-Humām, Fatḥ al-Qadīr, vol. 5, p. 327.
11
Muhammad Taqī al-‘Usmānī, “Aḥkām ʾAwrāq al-Nuqūd wa al-‘Umulāt” Majallat
Majmaʿ al-Fiqh al-Islāmī, no. 3, vol. 3, 1987, pp. 1704–1705; Mohammad Sulaimān al-
Ashqar “al-Nuqūd wa taqallub al Umalah,” Buhūth Fiqhiyyah fi Qadāyā Iqtisādiyyah,
Dar al-Nafāʾis Ammān, 1998, vol. 1, p. 289.
12
See for instance, Ibn al- Ḥ umām, Fatḥ al-Qadīr, vol. 6, pp. 168–170; Al-Khirshī,
Sharḥ Mukhtaṣar Khalīl, vol. 6, p. 205; al-Buhūti, Kashshāf al-Qināʾ, vol. 3, p. 498,
al-Mirdāwī, al-Inṣāf, vol. 5, p. 411.
Thus, to allow salam on paper money nowadays based on the above

argument is a false analogy. The present day currencies have all the
features of thaman and are meant to be thaman only. Therefore, to
consider them similar to fulus is a false analogy and disregards the
basic reality of modern life.
However, the idea of deferring one of the countervalues in foreign
currencies has unfortunately attracted some Muslim economists despite
its legal weakness. Thus, Mohammed Obaidullah endorsed this posi-
tion on the assumption that bay al-ṣarf means the exchange of gold
and silver only. He said, “bayʿ al-ṣarf is defined in fiqh literature as an
exchange involving thaman ḥ aqīqī,” defined as gold and silver, which
served as the principle medium of exchange for almost all major trans-
actions. He went on to say “the tradition mentioned about ribā, and
the sale and purchase of gold and silver which may be a major source
of ribā, is described as bay al-ṣarf by the Islamic jurists. It should be
noted that in fiqh literature, bay al-ṣarf implies the exchange of gold
and silver only, whether these are currently being used as the medium
of exchange or not.”
Based on this argument Obaidullah tried to prove that there is no
ribā in such a transaction from a practical point of view. Thus, he said
in his conclusion,
The second types of contracting with deferment of obligations of one of
the parties to a future date falls between the two extremes. While sharīʿah
scholars have divergent views about its permissibility, our analysis reveals
that there is no possibility of earning ribā with this kind of contract. The
requirement for settling the obligation of at least one party imposes a
natural curb on speculation, though the room for speculation is greater
than under the first type of contract. The requirement amounts to the
imposition of a hundred percent margin, which, in all probability, would
drive the uninformed speculator from the market. This should force
the speculator to be a little more sure of his expectations by being bet-
ter informed. When speculation is based on information it is not only
permissible but desirable too. Bayʿ al-salam also allows participants to
manage risks. At the same time, the requirement of settlement from one
end would dampen the tendency of many participants to seek a complete
transfer of perceived risk and encourage them to make a realistic assess-
ment of the actual risks.13
13
Mohammed Obaidullah, “Islamic Contracts for Currency Exchange: Divergent
Views and Implications,” Journal of Objectives Studies, Institute of Objectives Studies,
India, vol. 9, no. 2, July 1997/1416H, pp. 24–46.
100 chapter four
However, as we have mentioned above, the divergence of opinion

among classical scholars regarding the legality of exchanging fulūs
on a salam basis could not be extended to modern paper money
due to the clear differences between the two types of currencies.
Obaidullah’s analysis may have some basis from a practical point of
view, but its legal grounds are very weak and his conclusion is unaccept-
able. Thus, we may conclude that salam or the deferment of one of the
countervalues, while the other is delivered at the time of the contract,
is illegal and some of the practical advantages advanced in favor of such
a transaction cannot overrule this legal position. The present paper
currencies have effectively and completely replaced gold and silver as
the medium of exchange. Hence, by analogy, exchange involving such
currencies should be governed by the same sharīʿah rules and injunc-
tions. Therefore, if deferred settlement by either party to the contract
is permitted, this would be a clear form of ribā al-nasīaʾh.
Obaidullah did not limit this permissibility just to salam but extended
it to options. Thus, he maintained in his article, “Ethical options in
Islamic Finance” that the currency option poses some challenges for
scholars and researchers and there are divergent views on the issue of
the prohibition of ribā in currency exchange. The divergence is due to
the process of analogy (qiyās) in which the efficient cause (ʿillah) plays
an extremely important role. The process of analogy is needed since
gold and silver, which performed the function of money in the early
days of Islam, have been replaced by paper currencies. It is an efficient
cause (ʿillah) that links the object of the analogy with its subject in
the exercise of analogical reasoning. The appropriate efficient cause
(ʿillah) in the case of currency exchange contracts has been variously
defined by the major schools of fiqh. Accordingly, some jurists equate
currency exchange with bayʾ al-ṣarf in which spot settlement or qabḍ
by both the parties is insisted upon. Hence, options are automatically
ruled out. Others, primarily belonging to the Ḥ anafī school, permit
deferment of obligation by one party or bayʾ al-salam in currencies and
thus admit the possibility of options.”14 This conclusion is also based
on the above-mentioned basis and it is unacceptable. However, we will
14
Mohammed Obaidullah, “Ethical Options In Islamic Finance” Journal of Objectives
Studies, Institute of Objectives Studies, India, vol. 10, no. 1, January 1998/ 1418–H,
p. 79.
discuss the issue of options in currencies when we tackle options trad-

ing in general.
Another issue raised by Obaidullah which is also unacceptable is the
claim that the different currencies existing nowadays are only athmān
within the boundaries of the country concerned, unlike gold, which is
thaman in all places. Therefore, the rules of gold should not be applied
to these currencies. Thus, he argued that
A unique feature of thaman ḥ aqīqī or gold and silver is that the intrinsic
worth of the currency is equal to its face value. The question of different
geographical boundaries within which a given currency, such as the dinār
or dirham, circulates is completely irrelevant. Gold is gold whether in
country A or country B, and any deviation of the exchange rate from unity
or deferment of settlement by either party cannot be permitted as it would
clearly involve ribā al-faḍl and ribā al-nasīʾah. However, when the paper
currency of country A is exchanged for the paper currency of country B,
the case may be entirely different. The price risk (exchange rate risk), if
positive would eliminate any possibility of ribā al-nasīaʾh in the exchange
on a deferred basis. However, if the price risk (exchange rate risk) is zero,
then such an exchange could be a source of ribā al-nasīaʾh.15
Once again Obaidullah based his argument on the Ḥ anafīʾ view, although
he described it as the opinion of the large majority of scholars. He main-
tained that the ribā prohibition would require a search for efficient cause
(ʿillah) in the case of exchange involving paper currencies belonging
to different countries. Currencies belonging to different countries are
clearly distinct entities; these are legal tender within specific geographical
boundaries with different purchasing power. Hence, a large majority of
scholars perhaps rightly assert that there is no unity of ( jins). Addition-
ally, these are neither weighable nor measurable. This leads to a direct
conclusion that none of the two elements of efficient cause (ʿillah) of
ribā exists in such an exchange. Hence the exchange can take place free
from any injunction regarding the rate of exchange and the manner of
settlement. The logic underlying this position is not difficult to com-
prehend. The intrinsic worth of paper currencies belonging to different
countries differs as these have different purchasing power. Additionally,
the intrinsic value or worth of paper currencies cannot be identified or
assessed unlike gold and silver, which can be weighed. Hence, neither
15
Mohammed Obaidullah, “Islamic Contracts for Currency Exchange: Divergent
Views and Implications,” p. 35.
102 chapter four
the presence of ribā al-faḍl (by excess), nor ribā al-nasīaʾh by deferment
can be established.16
As we have mentioned above, Obaidullah’s argument is based on
the Ḥ anafīʾ approach in deducing what is the ʿillah in gold and silver
and arguing that these modern currencies are neither weighable nor
measurable. However, we have already examined the weakness of this
approach in deducing the ʿillah and the difficulty faced by the Ḥ anafīs
themselves in defending it concerning the legality of salam in weigh-
able items such as metal. On the other hand, to discern the difference
between what is ribawī and what is not on the basis of the assumption
that the exchange rate risk is positive or it is zero may not be correct
all the time. Moreover, even the rate of exchange between gold and
silver fluctuated from time to time throughout the Muslim history,
but this did not prevent the application of the rules pertaining to ribā.
Although it is not so volatile as it is in the case of paper money, there
is still some fluctuation. Lastly, the claim that these currencies are only
legal tender within their geographical boundaries and, therefore, should
not be considered like gold and silver in the area of currency exchange,
may not be correct in all aspects. Indeed, the currency of country A
may not be accepted as a medium of exchange in country B, but it is
still recognized as a store of value and can be exchanged with the cur-
rency of the first country without any reluctance, as long as it is still
the legal tender in its country of origin. For instance, the Saudi riyal
may not be accepted as a medium of exchange within Malaysia, but it
is recognized as a store of value and not just ordinary paper and can
be exchanged with the Malaysian ringgit at any time and any place. It
is similar to the case when one country is using gold as the medium
of exchange while the other is using silver. Both are regarded as stores
of value and the mediums of exchange in their respective countries,
and one medium of exchange may not be accepted as legal tender in
the other country, but they could not be exchanged unless it is hand-
to-hand. From the above, we could say that to exchange different cur-
rencies on the salam basis is illegal and there is no difference between
the deferment of one of the countervalues or both of them due to the
clear ḥ adīth stated before.
16
Ibid., pp. 28–29.
However, recognizing the benefits of forward currencies trading in the

modern economic system17 and being aware of the general agreement
that a deferred contractual obligation in foreign currencies is illegal in
Islamic law, Muslim scholars are striving to find the suitable Islamic
alternative, which can secure some of the benefits of the forward cur-
rency exchange without contravening Islamic rules. Thus, the idea of
mutual promise in currency exchange has been developed.
Mutual Non-Binding Promise in Currency Exchange
The need for mutual non-binding promise for currency exchange in

modern transactions is evident in the import and export sectors due
to unpredictable currency and exchange rate fluctuations. Thus, for
instance, a Malaysian exporter opens a credit in favor of an Egyptian
importer for the purchase of, say, palm oil. The rate of exchange of
the ringgit to that of the Egyptian pound may differ from the date of
the opening of credit until the receipt of the value of the said credit.
The Egyptian importer wishes to avoid the rise or fall of the exchange
rate while this promise will be executed on a future date agreed upon
between the parties after a real contract. Therefore, he would prefer to
carry out a promise of exchange of currencies by executing a promise
17
It is worth mentioning that some scholars have totally excluded any benefit for
forward currency trading. Thus Sāmi Hamoud held that “It is well known fact that in
practice dealing in exchange on the basis of the forward rate represents neither the need
of commerce nor the ordinary commercial activity, but is more or less a speculation in
the rate of currencies and of interest in the main international centers. For this reason
the local banks of many countries neither involve themselves nor deal in this risky
kind of exchange, which is rather an act of gambling.” This statement may have a kind
of objectivity with regard to those entering the forward currency market as specula-
tors, but it would be totally unfounded in the case of genuine traders trying to hedge
themselves against any currency fluctuation in the future. Moreover, the reasons for
which he is defending the concept of mutual promise in foreign exchange trading are
the same reasons for forward currency trading as practiced in the conventional system
of finance. It may be somewhat acceptable to say the harm in such a transaction is
greater than the benefit if it is used for speculative purposes. Therefore, it should not be
allowed in Islamic law. It could also be argued that it is against the principle of currency
exchange in Islam according to the majority opinion. For instance, in principle a ṣarf
transaction should be hand to hand and therefore, it should be prohibited. However, to
pass a general judgment that there is no benefit in such a transaction is far from reality.
Moreover, some commentators followed this opinion without any effort to investigate
the issue or to analyze it. See, for instance, Abd Allāh Abū Umair, al-Tarshīd al-Sharī
lil Bunūk al-Islamiyyah, International Association of Islamic Banks, p. 280.
104 chapter four
for the purchase of the equivalent amount of goods at the rate of

exchange prevailing on the date of opening the credit. Thus, this is a
mutual promise of exchanging currencies at the spot rate. It does not
involve delivery on the part of either party: it just involves a promise
to purchase, on a future date, at a rate fixed in advance.
The majority of Muslim scholars consider any promise to conclude
a foreign exchange transaction followed by a real contract to confirm
it later as an illegal transaction.18 Thus, for instance, Ibn Juzai cited
three opinions on the matter: the abhorrence (karāha) of the promise
of exchange, which is also the most renowned opinion; permissibility
(Ibāḥ ā); and banning (ḥ urma).19 Ibn Rushd (the grandfather) main-
tained that in the exchange of gold for silver, as well as in the sale of
gold for gold and silver for silver, mutual promise, option, guarantee
and assignment (transfer) are not permissible; only the immediate
delivery is possible. Also, al-Khirshī considered such kind of exchange
as void; he cited an example where a man tells another: “Let us go to
the market and take your darāhims with you; if they are good I will
take them from you so many for so many dirhams.” Then he quoted
the view of Ibn Shass to the effect that if such a case is permissible in
marriage during the ‘iddah (the waiting period for a woman who has
been divorced before marrying another person) it would be even more
appropriate in this case.20
Some modern Muslim scholars have also opposed the idea of mutual
non-binding promise in dealings involving foreign currency. Aḥmad
Muhy al-Dīn argues that such a promise is, in reality, a contractual
obligation, since the agreement must be executed at its maturity date.
Moreover, such a promise is not always concluded with good Muslims
since commercial deals could also be concluded with non-Muslims and
some morally corrupt persons who may not worry about defaulting on
their obligations as there are no legal consequences for such a default.
Besides, such a mutual promise contradicts the principle of immediate
or hand-to-hand delivery stipulated in the ḥ adīth which is unanimously
agreed upon as a condition in ṣarf or currency trading. In addition,
18
See for instance Mohammad Qadri Bāshā, Murshid al-Ḥ airān, p. 63. Ulesh, Sharḥ,
Minaḥ al-Jalīlʿalā Mukhtaṣar khalīl, vol. 2, p. 510. Ibn Rusd, al-Muqaddimāt, Dār Sādir,
Beirut, vol. 2, pp. 507–9.
19
Ibn Juzai, al-Qawānīn al-Fiqhiyyah al-Sharʾiyyah, Beirut, Maktabat ʿĀlam al-Fikr,
1975, p. 263.
20
Al-Khirshī, Sharḥ Mukhtaṣar khalīl, vol. 5, p. 36.
if we consider this transaction as a mutual promise while in fact it is

honored like a real contract, it would no longer be a promise because
“What is honored by custom is like what is stipulated as a condition.”
And “Consideration in contracts is to be given to the meaning and
not the form.” Furthermore, the objective of such a deal is to fix the
exchange rate at an agreed rate until the time of delivery and this could
not be done unless there is a contract, as is the case in the conventional
practice. Therefore, to apply the idea of mutual promise in ṣarf as cited
from al- Shāf ʿī and Ibn Ḥ azm is an invalid analogy.21
However, the permissibility of the mutual promise in ṣarf or currency
exchange is reported from al- Shāf ʿī, Ibn Ḥ azm al-zāhirī, and Ibn Nāfiʿ
from the Mālikī school. They regarded it as a legal transaction without
any reservation, while some other Mālikī scholars have divergent opin-
ions on the issue. Thus, al- Shāf ʿī said: “If two persons make a promise
to each other to exchange foreign currency in the future, there is no
problem.”22
The main argument is that a promise is not a contract and there is
no textual evidence that disallows such a transaction. Thus, Ibn Ḥ azm
stressed that “to make a promise to someone to buy or to sell gold for
gold, silver for silver, and the four other items cited in the ḥ adīth, is
legal whether the parties confirm this promise by a contract later or
not. This is because exchanging promises is not a contract and there is
nothing which prohibits it.”23 Ibn Nāfiʿ, a Mālikī scholar, has a similar
opinion.24 Ibn al-Qāsim, another Mālikī scholar, pointed out that such
a promise should be discouraged, but if a contract has been concluded
later on the basis of this promise, it would be legal and should not be
dissolved.25
The same line of argument among the classical scholars is manifested
in the writing of modern scholars. Thus, considering the complexity
of modern financial transactions, the need for a better planning in
international trade, and bearing in mind the general agreement among
Muslim jurists that a forward contract to exchange different foreign cur-
rencies is illegal in Islam, some modern Muslim jurists have suggested
21
Aḥmad Muḥyī al-Dīn, ʿAmal Sharikāt al-Istithmār al-Islāmiyyah Fi al-ʾAswāq
al-ʾĀlamiyyah, pp. 340–344.
22
al-Shāf ʿī, al-ʾUmm, vol. 3, p. 32.
23
Ibn Ḥ azm, al-Muḥ allā, vol. 2, p. 513.
24
Al-Ḥ attāb, Mawāhib al-Jalīl lī-Sharḥ Mukhtaṣar khalīl, vol. 4, p. 513.
25
Ulesh, Sharḥ Minaḥ al-Jalīl ʿalā Mukhtaṣar khalīl, vol. 2, p. 510.
106 chapter four
the adoption of the concept of promise to exchange different currencies

followed by a real contract to confirm it as a solution to the modern
problem of currency fluctuation.
Thus, the sharīʿah boards of several Islamic financial institutions have
opted for the approval of this kind of transaction. For instance, in the
first al-Barakah seminar a question was addressed as to the legal posi-
tion of making a promise to buy different currencies at the rate of the
day of agreement (the day of mutual promise) on the condition that
the mutual delivery of the exchange will occur later. This exchange
in the future will be hand to hand, considering that such a promise
could be binding or not. The answer was,—“If such a mutual promise
is binding on both parties, it falls under the general prohibition of
selling credit for credit, and it is not permissible. However, if it is not
binding upon the two parties, then it is permissible.” (First Albaraka
Seminar, Fatwā no. 13).
A similar question was again raised in the sixth al-Baraka seminar as
to the position of Islamic law on the issue of mutual promise concerning
currency exchange. The answer was
The rule in this issue is to confirm what is stated in the resolutions adopted
by the Second Conference of Islamic Banks held in Kuwait, March 1983.
The arrangement for the sale of currencies with deferred payment is
permissible provided the promise is not binding (This is the opinion of
the majority). If the arrangement is binding, it is not permissible. (Sixth
al-Baraka Seminar, Fatwā no. 23).26
The question was addressed to the sharīʿah board of the Kuwait Finance
House, as to what is the sharīʿah position on the possibility of making
a mutual promise to buy foreign currencies with the price determined
today and the mutual delivery will take place later. The board’s answer
was. “This kind of transaction is a mutual promise to buy, and if the
transaction is executed as it is formulated in the question, then there is
no legal problem. However, if the mutual promise is related to anything
that makes it binding, then it will be a kind of bayʿ al-kāliʾ bi al-kāliʾ,
which is prohibited.”27
26
Dallh Albaraka, Fatwa: Sharīʿah Ruling on Economics, Dallah Albaraka Research
and Development Department, Jeddah, Saudi Arabia, 1414/1994, pp. 71–72.
27
Bayt al-Tamwīl al-Kuwaitī, al-Fatāwā al-Sharʿiyyah fi al- Masāi’l al-Iqtiṣādiyyah,
Kuwait, 1986, vol. 1, p. 50.
The problem was addressed to the sharīʿah consultant of the Jordanian

Islamic bank in connection to the problem of currency fluctuation fac-
ing those who want to perform ḥ aj. The question was, “To facilitate the
issue of pilgrimage for those who are willing to visit the holy sites, the
Ministry of Awqāf would like to make an agreement (mutual promise)
with the Jordanian Islamic bank to purchase Saudi riyal at the price
fixed at the exchange rate of the day of the mutual promise, while the
mutual delivery will take place six months later. The Islamic bank will
deliver to the Ministry a cheque bearing the amount needed in Saudi
Riyal, and the Ministry for its part will deliver the amount in Jordanian
dinār.” Is it legal to make such a deal?
In his reply to this question the sharīʿah advisor said
The mutual promise to exchange different currencies with the exchange
rate fixed on the day of the mutual promise and the mutual delivery to
take place later without any regard to the exchange rate of the day of
delivery is legal. This could be accommodated in what is reported in
Nayl al-Awtār where the Ḥ anafīs and Shāf ʿī ‘s are of the opinion that it is
possible to exchange different currencies at the exchange rate of the day,
more or less. This approach may contravene what Ibn ʿUmar reported
to the effect that the legality of such a transaction is limited only to the
exchange rate of the day. However, it seems that the two Imams (Shāf ʿī
and Abū Ḥ anīfā) have based their opinions on the general ḥ adīth in which
the prophet said, “If these items [the six different items mentioned in the
ḥ adīth of ribā] are different, then, you can buy and sell if it is hand to
hand. Therefore, I consider such a deal, based on the Shāf ʿī and Ḥ anafī
opinion, as legal.”28
However, a close look at what is reported in Nayl al-Awtār shows that
the case to which the sharīʿah advisor is referring is about someone col-
lecting his debt in a specific currency, which he gave as credit but would
like to receive it now in another currency. In such a case it is possible to
get it back in another currency whether it is more or less than what is
in the liability of the debtor, because since it is an exchange of different
currencies, there is no need for equality. But it should be hand to hand.
Therefore, it seems that the sharīʿah consultant formed his opinion by
making an analogy with this case since what is reported in Nail al-Awṭār
is about collecting a debt and not about currency exchange.
28
Jordan Islamic Bank, al-Fatāwā al-Sharʿiyyah, vol. 2, p. 11.
108 chapter four
The advocates of this opinion argued that there is nothing that could
prohibit such a transaction, since there is no ribā, gharar, or jahālah.
On the contrary, the transaction serves a real public interest.
Sāmi Ḥ amoud, one of the first advocates of this alternative, argued
that if we look into the facts of the case and take into consideration
the service which the importer receives from the transaction (in the
case of the mutual promise to buy) and the service which the exporter
receives (in case of the mutual promise to sell), we find that the reassur-
ance made to the importer in regard to the price which he will pay, and
to the exporter for the price he shall receive, is a matter which has its
importance. Where the bank has to perform extensive transactions it will
be able to balance the mutual promise of sale and purchase transaction
per se where no real dealings of imports and export are involved.29
Farḥān al-Abbār argued that the concept of mutual promise is out-
side the boundaries of the texts prohibiting the exchange of currencies
unless they are exchanged on the spot. The objective of these texts is to
prohibit the deferment of one of the countervalues while the second is
present. This difference of time is the cause of ribā. This is totally differ-
ent from the mutual promise where both countervalues are exchanged
later at the same time and on the spot. What is agreed upon through
the mutual promise is just the exchange rate30 and not the formation
of a contract of currency exchange.
ʿAbbās al-Bāz argued that the objection of those who reject the
mutual promise to sell foreign currencies will be correct if the parties
in the contract consider it a binding obligation, which may fall within
the ambit of bayʿ al-kāliʾ bi al-kāliʾ. However, what the advocates of this
opinion propagate is just a promise and a promise is not a contract.
Furthermore, to consider the fulfillment of the promise as obligatory
or wājib if the second party enters into another deal based on this
promise will not transform the promise into a contract. Therefore, any
request for damages if one party is affected by the default of the other
will be based on the failure to fulfill his promise and not the failure
to fulfill his contract. In practice, the different parties would strive to
fulfill their commitment not because they consider it a contract but
just to safeguard their reputations and to win the confidence of other
29
Sāmi Ḥ assan Ḥamoud, Islamic Banking: The Adaptation of Banking Practices to
Conform with Islamic Law, Arabian Information, London, 1985, p. 180.
30
Farḥān al-ʿAbbār, Qadā yā Muʿāṣirah fi al-Nuqūd, p. 322.
market players in a competitive market. In addition, if we look to the

ratio behind the prohibition of such kinds of transaction, it is about
preventing people from using money as a commodity for trade. In the
case before us, the objective of the parties is not to trade in currency
but just to manage any risk arising from currency fluctuations and to
safeguard the mutual interest of the parties. Finally, it is evident from
practice that such a deal has not been the cause of financial crises and
none of the parties will use the transaction to monopolize the currency
demanded.31 El-Gārī had a similar opinion if the promise was not bind-
ing32 and Rafīq al-Miṣrī also shared the same opinion if the mutual
promise was not obligatory. In the same context, it should be noted he
considers the prohibition of deferment in currencies on the same basis
of sale of debt for debt and not as a case involving ribā.33 Some other
scholars also endorsed the idea.34
The AAOIFI’s Shariah standard on currencies trading states the fol-
lowing: “A bilateral promise to purchase and sell currencies is forbidden
if the promise is binding, even if for the purpose of hedging against
currency devaluation risk. However, a promise from one party is per-
missible even if the promise is binding.”
However, despite the arguments advanced by the proponents of the
idea of mutual promise, it has been criticised by other scholars, some
of whom we have mentioned above. Mindful of these criticisms, some
scholars have come up with new suggestions to resolve the problem.
Mutual Loan and Currency Risk Management
Some have advanced the idea of mutual loans. It should be noted once
again that Muslim scholars are only concerned with the problem fac-
ing genuine traders and how they could manage their investment risks
without compromising sharīʿah rules. It is with this vision that the idea
31
See ʿAbbās Aḥmad al-Bāz, Aḥ kām Ṣarf al-Nuqūd wa al-ʿUumlāt fi al-fiqh al-Islāmī,
Ammān, Dār al-Nafāʾis, 1999, pp. 130–131.
32
Mohamed ʿAli El-Gārī, “al-Aswāq al-Māliyyah”, Majallat Majmaʾ al-Fiqh al-Islāmī,
p. 1626.
33
Rafīq al-Maṣrī, al-Jāmiʿ fi Aḥ kām al-Ribā, p. 148.
34
ʿAbd Allāh ʿAbd Al-Rahīm al-ʿAbādī, Mawqif al-Sharīʿah min al-Maṣārif al-Islāmiyyah,
pp. 318–319; Mustaphā ʿAbd Allāh al-Hamsharī, al-Maktab al-Islāmī, Beirut, 1986, pp.
378–9, and Jihād Abū ʿUmair, Al-Tarshīd al-Sharīʿ lil Bunūk al-Islāmiyyah, International
Association of Islamic Banks, p. 204.
110 chapter four
of mutual loan or “al-murābaḥ ah al-islāmiyyah” or the Islamic swap, as

it was described by Jamāl al-Dīn ʿAṭiyyah, has been advanced. In this
transaction the Islamic bank and the genuine investor will exchange
an equivalent amount of money in different currencies for a specific
period as a mutual loan (qarḍ ḥ asan). During this period each party
has the right to use the amount of money he received in his respective
investment and will refund his original money on the agreed date.
To illustrate the situation we may take the following example. A
particular investor has, for instance, the amount of US $1 million that
he wishes to invest in Germany. However, he is afraid of the fluctua-
tion of the German mark during the period of the investment. Thus, to
manage this risk he may enter into an agreement of mutual loan with
the Islamic bank. He gives his US $1 million to the Islamic bank as a
qarḍ ḥ asan and he will receive the equivalent of this amount in Ger-
man marks from the Islamic bank as a qarḍ ḥ asan as well. Each one
has the right to invest what he has received during this period and at
the agreed date each of them will refund his original amount of money
or his qarḍ ḥ asan. Thus, this investor will have hedged himself against
any fluctuation of the German mark during this period at least for his
original capital.
However, it should be noted that the profit that may be generated
from this investment falls outside this approach of hedging.35 On the
other hand, the new formula will be useful only if both parties have
already at hand the required amount of money before entering the
mutual exchange of qarḍ ḥ asan. Moreover, the Islamic banks may not
be willing to cooperate; this is as it should be with these investors, since
there is no real benefit for the Islamic bank in such a deal. Furthermore,
it may face the risk of default from these customers.
Currency Basket and Risk Management
A third solution regarding the problem based on the concept of cur-

rency basket has been advanced by Saud Mohammad. He argued that
35
Jamāl al-Dīn ʿAṭiyyah, al-Bunūk al-Islāmiyyah Bainā al-Ḥ urrriyah wa al-Tanzīm;
al-Taqlīd wa al-Ijtihād; wa al-Nazariyyah wa al-Taṭbīq, kitāb al-Ummah, Qaṭar, Riʾāsat
al-Maḥākim al Sharʿiyyah wa al-Shʿūn al-Dīniyyah, Qaṭar, 1988, p. 163. Also see Abū al-Majd
Ḥarak, al-Bunūk al-Islāmiyyah ma lahā wa ma ʿAlayhā, Dār al-Ṣaḥwah, Cairo, n.d.,
p. 87.
an importer who faces the risk of currency fluctuation may make an

arrangement with the owner of the commodities to be imported that the
settlement of the price will be made in several different hard currencies.
It could be, for instance, the American dollar, the German mark, the
Swiss franc, and the Japanese yen. Thus, any depreciation in any one
of these currencies will be balanced by the appreciation of others and
it is unlikely that the package of currencies selected will depreciate all
at once. Thus this investor may be able to manage the risk of currency
fluctuation to some extent. However, it should be noted that this for-
mula could be of some help only for importers. Regarding exporters,
it is argued that those involved in export oriented trade should invest
in countries which do not place a lot of conditions on exports. Con-
sequently, at any period where there is currency depreciation in these
countries, this investor will be able to increase his exports since his
products will be more competitive on the international market.36
Managing Price Fluctuation through Deposit
Another solution proposed for an importer to protect himself against

currency fluctuation is that he should buy the amount of currency
needed for the settlement of his obligation and deposit it in the Islamic
bank and withdraw it when the time to settle his obligation comes.37 It
is clear that this solution will be useful only if the investor concerned
has the money at hand at the beginning. Moreover, through this
mechanism he will be prevented from investing this money in another
planned project.
Cooperative Funds and Currency Risk Management
A final solution to this real problem is that the different parties involved
in the import-export trade may establish a cooperative fund in which
the different parties would deposit a certain amount. An Islamic bank,
36
Saud Mohammad al-Rubaiaʾ, Taḥwīl al-Maṣrif al-Ribawī ilā Maṣrif Islāmi Wa Muqta-
dayātuhu, Markaz al-Makhtūtāt wa al-Turāth wa al-Wathāʿiq, n.d., pp. 299–300.
37
Ibid., p. 298. Also see ʿAbbās Aḥmad al-Bāz, Aḥ kām Ṣarf al-Nuqūd wa al-Umlāt
fi al-fiqh al-Islāmī, ʿAmmān, Dār al-Nafāʾis, 1999, p. 131 and Jihād Abd Allāh Ḥ ussein,
al-Tarshīd al-Sharʿī lil Bunūk al-Islāmiyyah, Matbūʿāt al-Ittiḥād al-Dawlī lil Bunūk
al-Islāmiyyah, p. 204.
112 chapter four
for instance, could manage the fund on their behalf. The parties would
share the profits, if any, and at the same time they would be able to face
any risks associated with currency fluctuation.38
Thus, it seems that all these solutions have some advantages but also
some limitations. Nevertheless, one could say that the idea of mutual
promise may not be the perfect solution to the problem and it may
not be without criticism. However, it could be considered as a suitable
temporary solution to the problem until a perfect one is discovered.
Our choice of this method would not be complete, however, unless
we state the sharīʿah position regarding such a promise. Muslim schol-
ars agreed that if the promise is related to permissible matter, then, the
one who makes a promise should fulfill it. However, they disagree as
to whether such a fulfillment is obligatory or just recommended. For
the majority it is just recommended to keep a promise. Therefore, if
someone fails to keep his promise, he will just miss the reward he may
get in the Hereafter.39 However, Ibn Shubruma regarded the fulfillment
of a promise as compulsory and if the one who makes the promise fails
to do so, he will be forced by the court to fulfill his obligation. This
opinion has also been attributed to the companion Samura Ibn Jun-
dub, ʿUmar Ibn ʿAbdul Azīz, the fifth rightly guided caliph, al-Ḥ assan
al-Baṣrī, Isḥāq Ibn Rŭhawaih, Saʾīd Ibn Omar Ibn al-Aswa’, al-Bukhārī,
and Ibn Qayyim. After attributing this opinion to this large number of
scholars, al-Qaraḍāwī maintained that it is clear that to attribute this
opinion to just Ibn Shubruma and some Mālikīs, as it is alleged by some
commentators, is unfounded. On the other hand, refuting the claim that
what is reported about the obligation to fulfill a promise is just limited
to the promise related to charity and maʿrūf, al-Qaraḍāwī said:
This is an unacceptable distinction. The legal evidence in the issue is
general and there is no evidence to restrict it to one area or another.
However, if we have to make a distinction between what is charitable
and the one involving financial transactions, it seems that the opposite of
what is claimed is right: it is logical to consider such a promise binding
in the area of financial transactions rather than that of a charity. This is
so because the financial harm which will be inflicted on the one entering
the deal as a commercial partner, who relies on this promise, will be much
greater than that with the one who is depending on charity. Therefore,
38
Qhassān Burhān al-Dinqalʾaji, Taqwīm Adāʾ al-Nashāt al-Maṣrifī al-Islāmī, p. 107.
39
See, for instance, al-Nawawī, al-Azkār al-Muntakhaba min Kalām Sayyed al-Abrār,
p. 282; Ibn Ḥ azm, al-Muḥ allā, bi al-Athār, vol. 8, p. 513.
the need to consider the promise as binding, especially if the party who
receives the promise is involved in a financial obligation, should not be
a point of disagreement.40
The Mālikīs are the most explicit in their support for the legal status of a
promise status and discussed it in detail. Thus, according to Mohammad
Ulesh, “There is no disagreement that the fulfillment of a promise is
recommended. However, there is disagreement concerning its obligation.
Is it obligatory to fulfill any promise or is it just recommended?”41 The
widely accepted opinion is that if the other party, while relying on this
promise, enters into some financial obligation based on that promise,
then the one who makes the promise should be obliged by the court
to fulfill it as his obligation.42 Thus, the final resolution of the Islamic
Fiqh Academy in its fifth session, Decision no. 2, held in Kuwait, stated
that a promise is binding from the religious point of view except when
there is an acceptable excuse. It is also binding in the court of justice
if the promise is dependent on certain reasons and the one promised
has incurred some costs as a result of the promise.
On the other hand, despite the fact that the modern spot transaction
in foreign exchange mentions that delivery will take place immediately,
in practice this is not the case in most instances, specially when the dif-
ferent banks are located in different countries. Generally, a spot foreign
exchange is defined as an agreement to deliver a specified amount of
foreign currency at an agreed price, usually within one or two business
days and sometimes on the same day.43 However, this delay of two days
does not prevent a western scholar from considering it as a contract
of immediate delivery. However, in Islamic law such a delay may pose
some legal problems and could be considered as a forward contract
rather than a spot one.
Saud Mohammad argued that considering such a transaction as a
spot transaction is misleading from the Islamic point of view, since
40
Yousuf al-Qaraḍāwī, “al-Wafāʾ bi al-Waʾd,” Majallat Majmaʿ al-fiqh al-Islāmī, vol. 1
no 6., pp. 849–856. For similar opinion and investigation see also ʿAbd- Allāh Ibn Manīʿ,
“al-Wafāʾ bi al-Waʿd wa ḥukm al-Ilzām bihi”; Harūn Khalīfa, “al-Wafāʾ bi al-waʾd fi al-
Fiqh al-Islāmī”; Ibrahim Fāḍil al-Dabu, “al-Wafāʾ bi al-waʾd” in the same journal.
41
Mohammad ʿUlesh, Fatḥ al-ʿAlii al-Mālik fi al-fatwā ʿalā Madhhab al-Imām Mālik,
vol. 1, pp. 254–258.
42
See, for instance, Shihab al-Dīn al-Qarāfī, al-Furūq, Dār al-Maʿārifah, Beirut, vol. 4,
pp. 21–25.
43
Peter S. Rose, Money and Capital Market—The Financial System in the Economy,
Business Publications, 1986, p. 791.
114 chapter four
delivery will take place after two working days. The exchange of offer
and acceptance by telex or any other electronic media could not be
considered as delivery because a real delivery will take place only when
the other party has withdrawn the exchanged money from his account
or he is in position to do so. Therefore, the modern spot foreign cur-
rency exchange could not be considered as a spot currency transaction.
It is, then, an illegal transaction according to the Qurʾān and Sunnah.44
However, Saud went on to suggest that the delay of two days in such
a transaction could be minimized by the opening of a mutual current
account with all the banks that the Islamic bank deals with. Thus, after
a spot transaction, both banks will be able to transfer immediately the
exchanged amount to the account of its counterpart.
Commenting on such a situation, Akram Khān wrote
The contemporary practice of allowing a two-day lag cannot be accepted
in the Islamic framework. One alternative could be that the exchange is
effected simultaneously by involving correspondent banks or agents at the
same situation. For example, suppose a bank in Ottawa wants to exchange
US dollars for Australian dollars, and the Australian bank is based in
Canberra. The Canberra bank may authorize a corresponding bank in
Ottawa to carry out the above transaction on its behalf simultaneously or
the Canadian bank may authorize a corresponding bank in Canberra to
execute the said transaction on its behalf. In brief, some mechanism will
have to be devised to execute the transaction simultaneously.45
However, in this particular case since the concept of account record or
al-qabḍ al-ḥ isābi, which is recognized by many contemporary Muslims
as a legal one the issue could be accommodated under it. Moreover,
such a transaction has become a necessity and we should not stick to
the literal meaning of the ḥ adīth. Furthermore, the whole concept of
qabḍ is based on custom and, therefore, whatever means judged by the
experts to be so should be accepted.
More importantly, the Islamic Fiqh Academy in its resolution 55/4/6,
March 1990, regarding “Al-qabḍ or Taking of Possession, its New Forms,
and Their Rules,” maintained that:
44
Saud Mohammad al-Rubaya’, Taḥ wīl al-Maṣrif al-Ribawī ilā Maṣrif Islāmi Wa
Muqtadayātuhu, Markaz al-Makhtūtāt wa al-Turāth wa al-Wathāʾiq, vol. 1, p. 278.
45
Muhammad Akram Khān, “Commodity Exchange and Stock Exchange in Islamic
Economy,” p. 103.
1. Taking of possession of properties could be through handing over,

scaling, measuring, or by transferring the purchased item to the
buyer’s possession. It could also be ḥ ukmī (constructive) by enabling
the buyer to do any action he wants with the property bought even
if there is no physical taking of possession. Furthermore, the way of
taking of possession could differ according to the subject matter of
the contract and the change of custom on what could be considered
as taking of possession.
2. Among the forms of al-qabḍ al-ḥ ukmī (constructive) recognized by
sharīʿah as well as by custom is al-qabḍ al-ḥ isābī or account record
in the account of a client in the following situations:
• By depositing the specific amount of money in the client’s account
whether directly or through money transfer.
• The client concluding a spot currency exchange with the bank and
that to be deposited in his account.
• The bank deducting a specific amount of money from the client’s
account, under his direction, to place in another account in the
same bank or another bank, for himself or for another person,
and the Islamic financial institutions observing the rules of ṣarf.
The delay in recording for a period, which disallows the beneficiary from
really taking possession, according to market practice is not considered
a problem. However, the beneficiary should not make use of the money
during this period until he receives the confirmation of real delivery.46
Similarly, al-Majmaʿ al-Fiqhī al-Islāmī in Makkah in its resolution in
the eleventh session, 1989, considered account record as a qabḍ ḥ ukmi
in money exchange and transfer.47
In conclusion, it may be said that although some scholars, if not the
majority, are still reluctant to admit the legality of the forward contract
in the commodity market, the general principles of Islamic law do
not reject it. Yet, some scholars, such as Nazīh Ḥ ammād, approve it
but under the principle of ḍarūrah or necessity. Perhaps it was on this
basis that Aḥmad Ḥ assan tried to restrict the use of this contract in
his book al-Awrāq al-Māliyyah just for the use of exports and imports,
and maintained that it could not be extended to the stock market, for
46
See Majallat Majmaʿ al-Fiqh al-Islāmī, no. 6, vol. 1, 1990, pp. 771–772.
47
Ibid., pp. 734–735.
116 chapter four
instance. It should be noted that he strongly defended the legality of

this contract without any restrictions in his book ʿAmal al-Sharikāt
al-Islāmiyyah. However, as we have demonstrated above, the admis-
sion of forward contracts in commodity trading in particular is not
contrary to any principle of Islamic commercial law, but is based on
the ordinary norms of the sharīʿah. It is not, then, an exceptional case
of necessity or ḍarurah.
However, one may ask why the futures contracts are needed if for-
ward contracts are sufficient for risk management purposes. It should
be noted that despite the fact that the forward contract is a useful tool
for risk management, it has its own shortcomings and is sometimes
associated with practical problems that could only be overcome through
the futures contracts. The three main problems that are associated with
the forward contract are as follows:
The first problem may be classified as the problem of double coincidence.
Here a party to a forward contract would have to find a counterpart who
not only has the opposite needs with the underlying assets but also with
regard to time and quantity. The counterpart must demand the product
in the right quantity, at the right time. Thus, a number of factors have to
coincide before a forward contract could be made. The second problem
with the forward contract often lies with the way the forward price is
arrived at. Typically, the forward price is arrived at through negotiation,
depending on the bargaining position of the parties. Therefore, it is pos-
sible that a forward price is forced upon the other party. This may be due
to the urgency of one party (e.g., perishable goods) or, more commonly,
due to asymmetric information. The third and probably the most impor-
tant problem with forward contracts is the counterpart risk. Counterpart
risk refers to the default risk of the counterparts in the contract. Though
a forward contract is a legally binding arrangement, legal recourse is slow,
time-consuming, and costly. Default in forward contracts arises not so
much from dishonest counterparts but from increased incentive to default
as a result of subsequent price movements. When the spot price rises
substantially above the forward price, the short position (seller) has the
incentive to default. The long position would have the same incentive to
default if the opposite happens and the spot price falls sharply.
As these shortcomings of the forward contract became apparent over
time, a new instrument that would provide the risk management benefits
of forward contracts while simultaneously overcoming their problems
was needed. The resulting innovation was the futures contract. A futures
contract is essentially a standarized forward contract. It is standarized
with respect to contract size, maturity, product quality, place of delivery,
etc. With standardization, it is possible to trade them on an exchange,
which in turn increases liquidity and, therefore, reduces transaction

costs. In addition, since all buyers and sellers transact through the
exchange, the problem of double coincidence is easily overcome. One
would transact in the futures contract maturity as many contracts as
needed to fit the underlying asset size.
With the exchange trading, the second problem with forward con-
tracts, that is of being possibly locked into an unfair price, would not
exist. This is because each party is a price-taker with the future price
being that which prevails in the market at the time of the contract ini-
tiation. As exchange quoted prices are market-clearing prices arrived at
by the interaction of many buyers and sellers, they would by definition
be “fair” prices.
The problem of counterpart risk is overcome in futures contracts by
means of the innovation principle. The exchange, being the intermedi-
ary, guarantees each trade by being the buyer to each seller and the
seller to each buyer. What this means is that each party transfers the
counterpart risk of forward contract onto the exchange in the case of
futures contracts. This transfer of risk to the exchange by the parties
in the futures contract has to be managed by the exchange, which now
bears the risk. The exchange minimizes the default risk by means of
the margining process and by daily marking to the market. The basic
idea behind the margining and marking to market process is to reduce
the incentive to default by requiring initial deposits (initial margins)
and recognizing losses as they accrue (margin call). This margining
and marking to market process has been refined and fine-tuned over
the years by futures exchanges to such an extent that incidences of
systematic default have been reduced to negligible rates.48
Seyed ʿAbd al-Jabbār, the chief executive of the Kuala Lumpur Com-
modity Exchange, pointed out one of the shortcomings of the forward
market in his comments to Akram Khān’s study and said, “The author
is right in saying that, without a futures market, a trader can still hedge
in the forward market, e.g., the Refined Bleached Deodorised (RBD)
Palm Oil string contract. But a default could occur in the sting and if
that happened there will be a lot of dissatisfaction and disputes. In a
futures market there is the guarantee mechanism, which will assure
48
See Obiyathulla Ismath Bacha, “Derivative Instruments and Islamic Finance: Some
Thoughts for a Reconsideration,” p. 5.
118 chapter four
parties to a contract guarantee of financial performance in the case of

defaults. The clearinghouse gives this guarantee.”49
In the next part of the study we will address the issues related to
futures contracts in commodities markets, such as their concept and
scope from an Islamic point of view, the issue of sale prior to taking
possession, the issue of just looking for price differentials, speculation
and selling with margins. In addition, the issue of sale of debt for debt or
bayʿ al-dayn bi al-dayn and its effects in the development of an Islamic
futures market will be addressed. Moreover, the study will expound on
futures markets’ regulation, the market offenses and how the Futures
Industry Act in Malaysia, in particular, deals with them.
Still, the issue of looking for price differentials remains an important
issue not only for the development of a viable Islamic futures market
but also for the development of an Islamic financial system in general.
Is looking for price differential a kind of gambling or speculation? Is it
possible to use hedging in Islamic finance? How could we differentiate
between speculation and hedging? Is it possible to make such a distinc-
tion by looking to the behavior of the market participants? What is the
role of brokers in these markets? Is it in line with Islamic principles?
What is the role of the clearinghouse? Is it necessary for a clearinghouse
in an Islamic market to be different from that in a conventional market?
These issues will be investigated next.
Concerning the possibility of a futures market in currencies from an
Islamic perspective, as we have seen in this part, even the conventional
forward contract in currencies is illegal in Islamic law, and because of
that Muslim scholars have resorted to other alternatives. Therefore, to
think of a futures market is out of context. Moreover, the larger part of
the currency market transactions at present is done under the forward
market followed by the spot market and lastly the futures market. 50
Therefore, any Islamic alternative in the currencies market should focus
on the forward market. Some alternatives have already been suggested,
as we have explained above, but more innovations are still needed.
49
Seyed ʿAbd al-Jabbār Shahabudin, “Comment on Akram Khān’s ‘Commodity Ex-
change And Stock Exchange in Islamic Economy’ , ” Journal of Islamic Economics, Inter-
national Islamic University, Malaysia, vol. 1, no. 2, July 1988, p. 72.
50
The forward contract dominates the currency market with seventh-three percent
of the total market. It is followed by the swap market with eighteen percent, the options
market at 3.5% and the futures market at one percent. See S. Sagha Balvinder, “Financial
Derivatives: Applications and policy Issues”, Business Economics, The Journal of the
National Association of Business Economists, vol. xxx, Jan 1995, p. 48.
THE FUTURES MARKET
CHAPTER FIVE
CONCEPT, SCOPE OF FUTURES

CONTRACTS AND SPECULATION
Concept of Futures Contracts
The nature of the futures markets was described by J. Lockhart in Syd-

ney Futures Exchange Ltd v. Australian Stock Exchange Ltd (1995) 13
ACLC 369 as follows:
A futures market is a market in which people buy and sell things for future
delivery. A futures contract generally involves an agreement to buy and
sell a specified quantity of something at a specified future date. The price
is variable, determined competitively by ‘open outcry’ on the trading floor
or through a computer-based marketplace. Futures markets perform the
economic function of managing the price risk associated with holding
the underlying commodity or having a future requirement to hold it. The
futures market is a risk transfer mechanism whereby those exposed to
risks shift them to someone else; the other party may be someone with
an opposite physical market risk or a speculator. By contrast securities
markets facilitate the purchase and sale of equities or debt instruments. A
small proportion of futures contracts results in the commodity or financial
instrument underlying the contract being in fact sold or bought by the
parties to the contract in satisfaction of their obligation in the contract.
However, the economic function of this delivery mechanism is to ensure
the contract price converges with that of the physical or cash market at
maturity. This is essential to the efficiency of the futures market in its role
of risk transfer and risk management mechanism. The delivery aspect
of futures contracts is not designed to make them alternative primary
investment or securities vehicles. Futures markets along with options and
other similar markets are often described as derivatives markets in the
sense that they are derived from the underlying instrument, for example,
the cash securities market.
A futures contract is defined under the Futures Industry Act (Amend-
ment) (Malaysia) as follows: “(a) an agreement that is, or has at any
time been, an eligible delivery agreement or adjustment agreement; (b)
a futures option; (c) an eligible exchange traded option; or (d) any other
agreement, or any other agreement in a class of agreements prescribed
122 chapter five
to be futures contracts under section 2B1 but does not include an agree-
ment (aa) which is (i) a currency swap; (ii) an interest rate swap; (iii) a
forward exchange rate contract; or (iv) a forward interest rate contract,
authorized by Bank Negara and to which a licensed institution is a party;
(bb) which when entered into in a class of agreements prescribed not
to be futures contracts; (cc) or which is prescribed to be an agreement
that is not to be traded in on a futures market.”
Thus, the Futures Industry Act divides futures contracts into four
categories:
• Eligible delivery agreements: These include futures contracts that

seek to cover agreements that may rise to an actual obligation to
effect delivery of the underlying instrument. However, it distinguishes
such contracts from forward contracts by referring to the features of
futures contracts that allow a party to close out its position by taking
an offsetting position in the market.
• Adjustment agreements: These refer to futures contracts that are
settled through price differential and not by delivery of the underly-
ing instrument.
• Eligible exchange-traded options: This category refers to options that
are traded on the futures market of an exchange company. Individual
stock options would come under this category of futures contracts.
• Futures options: These are options over futures contracts, i.e., where
exercise of the option will result in the holder of the option owning
a futures contract rather than an underlying instrument like shares
of a company.2
The main purpose of the futures market is to hedge risks. Thus futures
markets do not arise if the price of the commodity is not uncertain.
Uncertainty about prices arises from uncertainty about the supply and
demand of commodities. Thus, even though most seasonally produced
agricultural commodities are grown during some part of the year around
the world, supply is uncertain because the quantity of the harvest may
be affected greatly by weather conditions.
1
The Ministry may, by order published in the Gazette, prescribe any agreement or
class of agreements to be a futures contract.
2
Securities Commission, Malaysian Futures and Options: Regulations Module 1,
Securities Commission, Kuala Lumpur, 1999, pp. 2–7.
concept and scope of futures contracts 123
On the other hand, overall demand for most agricultural foodstuff,

for instance, is reasonably stable since final consumption patterns do not
change dramatically from time to time. However, uncertainty may arise
due to the uncertainty in the supply of a substitute commodity. Even
commodities which are continuously produced, such as gas, lumber,
or certain metals, face uncertainty of both supply and demand. Strikes
and unexpected increase in costs affect the supply. At the same time,
the demand for these commodities is more uncertain than it is for
agricultural products because these commodities tend to be industrial
material and, therefore, subject to business cycles.3
Characteristics of a Succesful Futures Market
1. The supply and demand that relate to the underlying commodity must
be large. In small markets, producers and users of the commodity
find it preferable to deal directly with each other rather than having
someone incurring the expense of setting up a futures market.
2. Prices must fluctuate or be volatile. If they are stable or nearly so
then there is no incentive for hedgers to hedge or for speculators to
participate in the market.
3. The commodity traded should be quantifiable to permit standard-
ized tests to grade quality. Quality should be described by objective
criteria, accepted by the industry. To ensure that the grading of the
commodities does not change, regular government inspections have
to be carried out.
4. Futures trading is unlikely to succeed in noncompetitive markets
where production of the underlying commodity is monopolized or
where buyers are few. In such markets, the danger is too great that
the cash price can be manipulated to produce artificial gains in the
futures contract. Thus, objective price information should be read-
ily available to the market participants. It should reflect the price of
the traded commodity, the accuracy of the spot price, and show its
relation to the futures price.4
3
See Hans R. Stoll, Robert E. Whaley, Futures and Options Theory and Applications,
Southwestern Publishing Co., 1993, p. 77.
4
See Robert E. Fink and Robert B. Feduniak, Futures Trading Concepts and Strate-
gies, New York Institute of Finance, 1988, pp. 14–16; Edward J. Swan (ed.), Derivatives
Instruments Law, Cavendish Publishing Limited, pp. 60–61.
124 chapter five
The above-cited features of futures contracts seem to have some similari-

ties with the forward contract. Therefore, a distinction between these
two types of contracts is necessary.
Futures Contracts and Forward Contracts
The present study has already elaborated on the concept of the forward
contact. However, due to confusion between the forward and futures
contract and the overlap between them in the written works of some
scholars, it seems necessary to enumerate the distinctions between the
two contracts.
Futures contracts began as forward contracts where buyers and sellers
agreed to sell or to take delivery of a specified quality and quantity of
a commodity at a specified future date. The use of forward contracts
became a necessity once spot markets proved their inability to handle
excess supply or excess demand for commodities. For example, the
dumping of excess grain in the Chicago River of the United States
became a common practice among wheat producers who where unable
to sell their harvest in the spot market because of excessively low prices
and the absence of adequate storage facilities.
The forward contract was only a partial answer to the problem. While
it matched buyers with sellers, so that farmers were assured of a sale at
a certain price and users were assured of an adequate supply of com-
modities at a known price, the forward contract was unable to provide
a price risk mechanism due to sudden changes and was not sufficiently
liquid.5 Thus, the need for a futures market arose. In fact, the forward
contract is the fundamental building block on which futures markets are
based. In other words, a futures market is a special kind of organized
forward market.
However, the futures contract, as distinct from a mere forward con-
tract entered into by any prudent producer or user of a commodity,
has several special features:
1. First, it is made in a market place particularly reserved for futures

trading, to which only listed members of the market are allowed,
while a forward contract does not need any specific market.
5
See Yeo Keng Un, Investment & You, Pelanduk Publications, Selangor Malaysia,
1991, p. 215.
2. Secondly, all trading in the futures market is done by open outcry.

That is to say, a bid or offer must be made aloud to the whole mar-
ket place and may be accepted openly by any member. There is no
undisclosed or selective trading. The market price is at all times
known and as closely as possible reflects supply and demand among
those who are trading. In the forward market in contrast, the parties
have the right to conclude the contract as they wish.
3. Third, futures contract trading is confined to commodities of stan-
dard specification in standard quantities generally known as lots.
For instance, the contract size of a crude palm oil future contract in
Malaysia is twenty-five tons of crude palm oil. Similarly, the grade
or quality of the underlying asset is specified to allow participants in
the market to trade with some confidence knowing that all transac-
tions are based on the same quality and quantity. Delivery time is
also standardized in order to enhance the liquidity of the market. On
the other hand, the forward contract can be tailored according to the
specific needs of the contracting parties. There is no standard size
and no intermediary between the parties to the forward contract.
4. The fourth and most important feature is that a party to a futures
contract may, at any time before delivery, obtain a discharge of his
obligations by entering into a matching or opposite contract with any
member of the market for the same delivery date or month. Thus
A, who has sold five lots of cotton, for instance, to B for delivery in
March at $150 per ton, may at any time before the close of trading
day for March buy the same quantity from C for delivery in that
month. Once this matching contract is registered with the market’s
clearing house, and A has asked for the two contracts to be closed
out or settled, he will be fully discharged of his original obligation
to deliver cotton to B and to take delivery from C.6 Meanwhile, in
a forward contract the parties are under obligation to take delivery
at the maturity date.
5. Similarly, in a futures market, the period during which delivery may
occur is limited to only a few relatively brief periods during a year
(which vary from commodity to commodity) and delivery must
take place at a single location. Meanwhile, in a forward contract the
place of delivery will be according to what is agreed upon between
the parties.
6
See P.J. Ottino, “Oil Futures: The International Petroleum Exchange of London,” Jour-
nal of Energy & Natural Resources Law, London, Sweet & Maxwell, 1985, pp. 1–2.
126 chapter five
6. Finally, if a futures contract is breached, the resulting claim for dam-

ages entangles the individual parties with the future exchange itself
and not with the party on the other side of the agreement. In other
words, the exchange is responsible for providing the requisite com-
pensation to the party suffering from the breach, and the exchange
must undertake any action necessary to secure damages from the
breaching party. So at least three parties are involved in a dispute
on futures exchange and not two.7
Table No. 2.2 Comparison Between Futures and Forward Contracts

Item Futures Forward
1. Market Place Specific market place that Does not need any
is reserved to listed specific market
members only
2. Mode of Through open outcry The parties have the right
Contract to conclude the contact as
they wish
3. Subject Matter Confined to commodities Tailored according to the
of standard specification specific needs of the
(lots) contracting parties
4. Discharging of Possible to discharge Parties are under
Obligation obligations by entering obligation to take delivery
into a matching contract at the maturity date.
5. Delivery Time Limited to only brief According to what agreed
periods during a year. upon between the parties
6. Breach of Entangles the individual The settlement of the
Contract and party with the Futures dispute will involve the
Claim for Exchange and not the two contracting parties
Damages party on the other side of only.
the agreement.
To illustrate the characteristics of a futures contract from real practice,

let us consider the crude palm oil futures contract specifications as they
are applied by the Commodity and Monetary Exchange of Malaysia
(COMMEX) as of November 2000.
7
See S. Craing Pirrong, David Haddock and Roger Kormendy, Grain Futures Contract:
An Economic Appraisal, Kluwer Academic Publishers, Boston, 1993, p. 2.
Contract size: 25 metric tons

Delivery Months: current and the next five succeeding months,
and thereafter alternate months up to twelve
months forward.
Price Quotation: Malaysian Ringgit per metric ton.
Minimum Price Fluctuation: RM 1.00 per metric ton.
Daily Price Limits: RM 100 per metric ton above or below the Settlement
Prices of the preceding day for all months, except current month. Limits
are expanded when the Settlement Prices of all three quoted months, which
immediately follow the current month, in any day are at limits as follows:
Day Limit (RM)
First 100
Second 150
Third 200
Daily price limits will remain at RM 200 when the preceding day’s settle-
ment prices of all three quoted months immediately following the current
month settle at a limit of RM 200.
Reportable Position: 100 or more open contracts, either long or short, in
any one-delivery month.
Speculative Position: 500 contracts net long or net short, for any delivery
months combined.
Transaction Limit: Each single transaction shall not exceed twenty lots.
Last Trading Day: A contract month expires at noon of the fifteenth of the
month; if the fifteenth is a nonmarket day, it expires the preceding business day.
Tender Period: First business day to the twentieth day of the delivery month;
if the twentieth is a nonmarket day, the preceding day.
Contract Grade and Delivery Points: Crude Palm Oil of good merchantable
quality, in bulk, unbleached, in Port Tank Installations located at the option
of the seller at Port Kelang, Butterworth/Prai and Pasir Gudang. Free Fatty
Acids (FFA) of Palm Oil delivered into Port Tank Installations shall not
exceed four percent and from Port Tank Installations shall not exceed five
perent moisture and impurities shall not exceed 0.25%.
Deliverable Unit: Twenty-five metric tons, plus or minus not more than
two perent. Settlement of weight differences shall be based on the simple
average of the daily Settlement Prices of the delivery month from: (a) the
first business day of the delivery month to the business day immediately
preceding the last day of trading, if the tender is made on the last trading
day or thereafter.
Trading Hours: Malaysian Time, on each business day
10:30 a.m.–12:30 p.m.
3:00 p.m.–6:00 p.m.
128 chapter five
To illustrate the above situation let us examine the following example to

see how the forward contract is needed and how it falls short of solving
some problems associated with commodities trading and, therefore,
why the need for futures market arises. It is the example of a farmer
and a textile mill.
A cotton farmer has estimated that he will harvest 50,000 pounds of
cotton. He also knows from discussions with fellow farmers that local
merchants are presently willing to pay sixty cents per pound for the
grade of cotton he expects to produce. Based on his expenses for seed,
labor, fertilizer, machinery and so on, his cost is fifty cents per pound.
The farmer is concerned that a drop in prices from the present levels
may cut deeply into his year’s earning. A drop of more than ten percent
per pound would actually produce a loss on each pound he harvests.
In a world that has no forward or futures market, the farmer must wait
until the harvest of his cotton before selling his cotton at whatever price
prevails at that time.
To avoid the possibility of loss, the farmer calls a textile mill and
asks the mill manager about the price that he could guarantee now for
cotton that will be delivered in three months time. The manager of the
textile mills is concerned that recent adverse weather will result in a
smaller than expected supply and higher prices at harvest time. Since
he has already committed himself to deliver raw material of cloth to
a clothing manufacturer in the late fall, he is concerned that a rise in
the price of the raw cotton will reduce or eliminate his profit margin.
He contacted the farmer and informed him that he would be pleased
to be guaranteed the supply of raw cotton in October at today’s price
of sixty cents per pound. The farmer agreed after little haggling. Thus,
the farmer agreed to deliver to the textile mill 50,000 pounds of cotton
in October and the terms of that agreement are stipulated in a formal
contract known as the forward contract. The terms of the forward
contract include the following;
• The quantity to be delivered

• The particular quality of the cotton to be delivered
• The date on which the cotton is to be delivered
• The location at which delivery is to be made
• The terms of payment upon delivery.
Thus the forward contract represents a formal agreement between two

parties to provide and to take delivery of a specific quantity and quality
of a commodity at a specified place and future time.8
However, the business conditions might go beyond the above situa-
tion. Let us introduce some new elements into the picture. A favorable
change in weather brings about a decline in spot cotton prices to fifty-
five cents per pound. The farmer in the above example is pleased by his
early decision to enter into the contract because it will have allowed him
an additional profit of five cents per pound. The textile mill manager,
however, is regretting his decision because he would have been able to
buy his cotton five cents cheaper had he not entered the contract.
On the other hand, suppose the manager of the textile mill becomes
convinced that the improved weather outlook will bring about a further
deterioration in price. He wants to cut short his loss and has two ways of
doing so. He can ask the farmer to dissolve the contract, but the farmer
would be foolish to do so without requiring the textile mill to pay him
a penalty equal to the difference between the sixty cents per pound
contract price and the present price of fifty-five cents per pound. Even
with this penalty, the farmer has no assurance that he will find another
buyer. So, unless he believes that the cotton price has bottomed out, he
will hold the textile mill to the contract. The textile miller manager’s
second choice is to look for someone else to buy the contract from
him. To do this the manager will have to pay the buyer five cents per
pound to compensate him for the difference between the sixty cents
per pound the buyer will have to pay the farmer and the fifty-five cents
per pound at which he would be able to buy cotton in the open market.
A local businessman hears about the textile mill’s problem.
From the above it is clear that the futures contract is a special kind
of forward contract. The study of futures contracts from the Islamic
perspective could be based on two alternatives:
The first alternative will be the legality of the conventional forward con-
tract in Islamic law as it was elaborated and established at the beginning
of this study. Still, some scholars maintain that the conventional forward
contract is illegal in Islamic law although there is no evidence to support
such a claim. They have supported their claim by relying on some general
principles such as the prohibition of bayʿ al-kaliʾ bi al-kaliʾ, although a
8
See Robert E. Fink and Robert B. Feduniak, Futures Trading Concepts and Strate-
gies, Institute of Finance, New York, 1988, pp. 3–5.
130 chapter five
correct interpretation of these principles clearly shows that they are not
applicable to the forward contract in commodities, the specific issue of
our discussions.
Therefore, since we have already established the legality of the forward
contract in physical commodities in particular, the possibility of a futures
commodity exchange from an Islamic perspective will arise and will
be addressed in this part of the study. On the other hand, the second
alternative will be grounded on salam and ‘istiṣnāʿ as an alternative to
the conventional forward contract.
A Brief History of the Futures Commodity Market
Commodities are common raw materials and foodstuffs, which in their

bulk forms provide basic elements in consumable goods when manu-
factured or processed. The first traded commodities were primarily
agricultural products; later they were joined by the metal-based com-
modities needed in farming, tool-making, weaponry, as well as precious
metals required for jewelery and, more importantly, oil and its deriva-
tives. Commodities comprise virtually all of the most widely traded raw
materials upon which commerce is based.
The origins of futures trading have been ascribed to various past
cultures and economics systems. However, the first system of trading of
futures delivery recognizably similar to modern exchanges was devel-
oped in Japan in the seventeenth century. In the Western world, “to
arrive contracts of sale” date from 1780 in the Liverpool cotton trade
and many existed earlier. In the United States, the Chicago Board of
Trade was formed in 1848, and in 1865 the foundations for all modern
futures contracts were laid down in contracts by introducing grain
agreements which standardized quality, quantity, date, and location of
grain contract. As a result, the only condition left for the contract was
the price, which was open to negotiation by both parties to the con-
tract. By the early 1970s the world commodity and financial markets
had been subjected to dramatic political, economic, and regulatory
changes, which paved the way for the introduction of new financial
futures markets.9 Nevertheless, the present study is mainly concerned
with the commodity futures market.
9
See David Courtney and Eric C. Bettelhim, An Investor Guide to the Commodity
Futures Markets, London, Butterworths, 1986, p. 3; Anthony F. Herbest, Commodity
The Kuala Lumpur Commodity Exchange (KLCE) is perhaps the

first modern commodity market in the Islamic world. Thus, prior to
the establishment and operation of the KLCE in 1980, there was a quasi
“Futures Exchange,” namely the Malaysian Rubber Exchange (MRE),
which was set up in 1962 to provide facilities for trading rubber futures
on what was referred to as the “whispering trading system,” by clearing
and settling contracts on a fortnightly basis.
However, the MRE was not regarded as suitable for the industry,
which required a more open, transparent, and efficient market. More-
over, considering that Malaysia was the largest producer and exporter
of rubber, palm oil, and tin, and the fact that a number of commodity
futures commission houses, some of which were foreign-owned, were
offering overseas commodity futures to the public, the Malaysian gov-
ernment in collaboration with the private sector took the initiative to
establish a legal framework for a modern futures exchange that could
provide an efficient price-discovery mechanism and meet the risk-
management needs. Thus, the Commodities Trading Act was enacted
in 1980 to provide for the establishment of a commodity exchange and
to control trading in commodity futures contracts.10
The Exchange started operation on the twenty-third of October, 1980,
with crude palm oil as its first contract. However, in 1984 the market
witnessed a crisis due to some weakness in the legal framework and
structural and operational deficiencies in the system. The Malaysian
futures industry model was largely based on the Hong Kong Commod-
ity Exchange and the Sydney Greasy Wool Exchange. These models, in
turn, were structured along the lines of the British trade denominated
futures markets model and therefore, were found unsuitable under the
Malaysian speculative environment.11 The present study will elaborate
on the issue when it addresses speculation in the futures market.
Futures Markets Methods of Analysis, and Risk Management, John Wiley & Sons, 1986,
New York, p. 2; The Reuters Financial Training Series, An Introduction to Derivatives,
p. 40.
10
See Seyed ʿAbdul Jabbār Shahābudīn, “Regional Experience of Exchanges (KLCE/
KLFM, SIMEX, SFE),” presented at The 1995 Malaysian Capital Markets Conference,
12–13 June, 1995, The Kuala Lumpur Hilton, organized by Securities Industry Develop-
ment Center, Securities Commission and managed by Asian Strategy and Leadership
Institute, pp. 1–2; Seyed ʿAbdul Jabbār Shahābudīn, “Futures Market in Malaysia,”
Financial Derivatives and Risk Management Workshop, 7–10 October 1996, the Legend
Hotel, pp. 1–4.
11
Ibid.
132 chapter five
Following the 1984 crisis there was an overhaul in the Commod-

ity Trading Act of 1980 for futures trading in Malaysia. The Act was
repealed and replaced by a new Act, entitled the Commodities Trading
Act of 1985, which provides for the establishment of the Commodi-
ties Trading Commission (a statutory body) with wide powers. Under
the previous arrangement, the Commodities Trading Council acted as
a department of the Ministry of Primary Industries. A new clearing
house, the Malaysian Futures Clearing Corporation (MFCC) with an
issued capital of twenty-five million Malaysian Ringit was established
with seventy percent of the equity being taken up by the Kuala Lumpur
Commodity Exchange (KLCE) and clearing members, while the balance
was taken up by a consortium of banks. Under the new structure, the
management of the KLCE and MFCC was strengthened to provide for
a clear authority, clear communication and coordination of action.12
The Exchange admitted individuals to trade on the floor in 1988 and
since then their contribution to the crude palm oil (CPO) market has
increased to thirty percent of the volume. The Exchange and the clear-
inghouse emerged stronger after the restructuring and more effective
in performing their risk-management functions. The volume of crude
palm oil futures has been increasing at an average rate of sixty percent
since it was relaunched in 1986.13 The market is sufficiently liquid for
the purpose of trading in The Association of Southeast Asian Nations
(ASEAN) as well as in other palm oil producing and consuming coun-
tries. Thus, the new strong foundations and the success of the crude
palm oil futures market provided the impetus for the KLCE to venture
into financial futures.14
On August 19, 1992, the KLCE, with the support of the government
authorities, incorporated a wholly owned subsidiary called the Kuala
Lumpur Futures Market Sdn Bhd (KLFM), which was later renamed the
Malaysia Monetary Exchange Bhd (MME) in mid 1995. On May 7, 1996,
12
Seyed ʿAbdul Jabbār Shahābudīn, “Futures Market in Malaysia,” Financial Deriva-
tives and Risk Management Workshop, 7–10 October 1996, the Legend Hotel, pp. 2–4.
13
Seyed ʿAbdul Jabbār Shahābudīn, “Regional Experience of Exchanges (KLCE/
KLFM, SIMEX, SFE),” The 1995 Malaysian Capital Markets Conference, 12–13 June,
1995, The Kuala Lumpur Hilton, organized by Securities Industry Development Cen-
ter, Securities Commission and managed by Asian Strategy and Leadership Institute,
pp. 6–7.
14
Seyed ʿAbdul Jabbār Shahābudīn, “Financial Derivatives and Risk Management,”
Workshop organized by the Securities Commission and The Options and Clearing Cor-
poration, 10–13 Oct., 1995, p. 3.
the Minister of Finance approved the establishment and operation of the

MME as a futures and options exchange company and the three months
KLIBOR (Kuala Lumpur Interbank Offered rates) futures contract was
launched on May 28, 1996. On November 9, the KLCE was renamed
the Commodity and Monetary Exchange of Malaysia (COMMEX) in
preparation for the merger with the Malaysian Monetary Exchange. The
merger took place on December 7, 1998.15
Scope of the Futures Market
It must be noted that in the evaluation of futures contracts from an

Islamic point of view, we are primarily concerned with commodity
futures as the most probable area in which an Islamic alternative is
possible. Therefore, we are not concerned with the broader concept of
commodity used by some writers,16 which includes currencies, bonds,
interest rates, and other financial futures. We are interested only in the
physical commodities market. Thus, the futures contract in currency, for
instance, is beyond the scope of this study and of the Islamic finance in
general. Even the forward currency market as it is in the conventional
form is unacceptable in the sharīʿah, where prompt exchange or hand-
to-hand delivery is a fundamental condition in currency trading.
Physical commodities are generally divided into metal, energy prod-
ucts, grain, and soft commodities such as coffee, cocoa, sugar, or cotton.
However, from an Islamic legal analysis another classification of all the
above kinds of physical commodities is necessary. Thus, a distinction
will be made between foodstuffs and non-foodstuff commodities. This
is necessitated by the ḥ adīth of the Prophet (PBUH) to the effect, “Do
not resell foodstuff before taking possession.”17 Based on this, there is
a wide debate among Muslim scholars regarding the legality of selling
something before taking possession and whether this prohibition is
limited to foodstuff or generalized to all commodities. Since some of
the commodities in the futures markets are foodstuff, it is necessary
15
Securities Commission, Malaysian Futures and Options Regulations Module 1, p. 5.
16
See for instance, T.H. Stewart (ed.), Trading in Futures, Woodhead Faulkner Lim-
ited, Cambridge, fifth edition, 1989, p. 1.
17
Sahīh Muslim, vol. 10, p. 169.
134 chapter five
to investigate whether it is permissible to trade them or not in the

futures market. Whether the above ḥ adīth is based on a rationale or
ʿillah and whether this ʿillah is still present or not. These are the themes
to be addressed.
This classification is necessary whether we adopt the conventional
forward contract or salam as the basis for the permissibility of futures
contract trading. Moreover, if the futures market is based on salam, an
elaboration on the parallel salam is necessary.
Economic Benefits of Futures Contracts
Some Muslim economists have stressed the need for a futures market.
Obaidullah, for instance, argues that it might be safer for Islamic schol-
ars to be on the side of conservatism by declaring these contracts to
be illegal. However, such a position may have serious consequences for
Islamic business in the long run. Thus, in an increasingly competitive
and sophisticated business environment, denying Muslim businessmen
the use of a flexible and powerful array of instruments may place them
at a disadvantage.18
Fahīm Khān has also argued in favor of an Islamic futures market.
However, his attempt has been affected by the prevailing differences of
opinion regarding some of the issues constituting the legal foundation
of futures contracts. Sometimes he even rejects the opinions that are
in line with the general principles of the sharīʿah for the simple reason
that they are not preferred by some modern scholars. Thus his study
has many limitations.19
Similarly, Munzir Khaf has argued in favor of such a market while
explaining the features of futures contracts to Muslim jurists and dis-
cussing the legality of futures contracts at the Islamic Fiqh Academy. He
has pointed to the fact that the futures market is the only market where
large business deals are concluded and is an effective means for price
discovery. Moreover, he warns that even if the Fiqh Academy passed
a negative decision on these markets, an Islamic alternative must be
18
Obiyathulla Ismath Bacha, “Derivatives Instrument and Islamic Finance: Some
Thoughts for Reconsideration”, p. 9.
19
See Fahīm Khān, Islamic Futures and Their Markets with Special Reference to Their
Role in Developing Rural Financial Market, Islamic Development Bank, Jeddah, Saudi
Arabia, 1995.
sought due to the importance and real benefits and objectives of these
markets, especially in the commodities market.20
This stand has been echoed by ʿAbdel-Ḥ amīd al-Ghazālī who stresses
the real benefits of futures markets, especially their effect on supply,
cost, and business planning and the fact that these genuine benefits
should be taken into consideration.21 Indeed, this concern voiced by the
economists has influenced some jurists attending the above forum, such
as ʿAbd Allāh bin Beh and Mukhtār al-Salāmī, They argued that there
is a real need for such a market by pointing out that modern Muslim
jurists must address such problems according to modern circumstances,
and scholars must not limit themselves to quote what is recorded in
classical fiqh and pass a prohibitive decision.22
Unfortunately, this concern has not been reflected in the final resolu-
tion of the Academy. Perhaps this was due to the stand of some scholars,
such as Ṣiddīq al-Ḍ arīr who asserted that any possible alternative to
futures contracts should be based on salam and must fulfill its con-
ditions.23 It should be noted that Khaf in his elaboration pointed that
salam in its actual form could not serve this purpose due to the fact
that in salam the price must be paid in advance.24
On the other hand, a futures exchange provides some specific ben-
efits to the economy as a whole, such as risk shifting, price discovery,
enhanced liquidity, and increased information flow. Normally, the
producers or manufacturers of a product would like to determine by
themselves the price of their product, but in terms of economics, the
fixed price system results in resource misallocation and high cost, etc.
Primarily, agricultural products are subject to a market price system,
which sets the equilibrium between production and consumption. This
is because the volume of supply and demand for most agricultural
products is beyond the scope of regulation of either government or
producers. Commodity exchanges have been established in order to
avoid losses due to price fluctuations that can result from the law of
supply and demand.25
20
Majallat Majma. ʿal-Fiqh al-Islāmī, 1991, no. 7, vol. 1, pp. 620–621.
21
Ibid., pp. 639–640.
22
Ibid., pp. 626–627, 641.
23
Ibid., p. 634.
24
Ibid., p. 641.
25
Hiromu Takahashi, “Commodity Futures Trading and its Role in Business Manage-
ment,” The Proceeding of the Malaysian International Symposium on Palm Oil Processing
136 chapter five
Risk shifting was the main reason for the development of futures
markets. Typically, hedgers use futures to reduce their exposure to
price fluctuations. The futures market permits commercial producers,
processors, end users, and traders to look for a price for their products.
Industrial processors, for example, may choose to eliminate the price risk
involved in buying, storing and eventually using their raw materials. In
a market economy, manufacturers run the risk of large changes in the
prices of the raw material or the final products between the time they
buy their raw material and the time they sell their final products.26
Liquidity is another major benefit of the futures market. Thus, if risk
is to be transferred efficiently, there must be a large group of traders
ready to buy and sell. When a hedger wants to sell futures contracts to
protect his business position, he cannot afford to wait around for a long
time for a buyer. He needs to know whether he will be able to effect the
transaction quickly whenever he wishes to do so. The futures exchange
brings together a large number of traders and speculators, thus making
quick transactions possible.
Moreover, the development of production techniques of the com-
modities, which are adaptable to futures trading, must be susceptible
to standardization and grading. The quality in each grade must also be
standardized. Therefore, producers should work to improve produc-
tion techniques so that their commodities may have proper grade and
standard to be traded in a favorable market. In addition, as producers
and organizations connected with commodities markets make efforts
to improve their own situation, the level of education and knowledge
about the marketing of their products will be elevated.27
Referring to some of the advantages considered by the Malaysian gov-
ernment for the establishment of its own Commodity Futures Exchange,
we may mention that, considering the fact that Malaysia is the largest
producer and exporter of rubber, palm oil, and tin, to allow a number
of futures commission houses (owned sometimes by foreigners) to
offer overseas commodity futures to the public represents, in fact, a
disadvantage to the national economy. The establishment of a local com-
and Marketing 17–19 June 1976, edited D.A. Newal, The Incorporated Society of Planters,
Kuala Lumpur, 1977. p. 515.
26
See International Trade Center UNCTAD/GATT, Cocoa: A Trader’s Guide, Geneva,
1987, p. 140.
27
Hiromu Takahashi, “Commodity Futures Trading and its Role in Business Man-
agement,” 515.
modities exchange will provide local producers with facilities to hedge

or transfer their risks as well as guaranteeing them leverage in the deter-
mination of price trends. Moreover, such an exchange can complement
the existing principal centers overseas—namely Chicago, London, and
Rotterdam—in offering arbitrage opportunities for the price differences
and time-zone variations that exist among these markets.28
Thus, Dato Bek Neilsen, for instance, said:
Long gone are the days of the palm oil pool in London and it is visualized
that this exchange (KLCE) will serve as an important market for palm oil,
right at the main area of its production and we may rightly ask what could
be more natural than to bring home, where it belongs, that which has for
so long been centered abroad . . . the Malaysian palm oil industry has now
reached the stage where it must take control of its own destiny.29
Normally when a country develops, it is inevitable that local govern-
ments will want to retain a greater influence over the price paid for
what they produce. The logic goes something like this: if we are one of
the largest producers of a specific commodity, why should the price be
determined by traders and speculators on the other side of the world?
Why can we not have a futures exchange here that is closer to the source
of supply and where spin-off activity from trading—such as employment
opportunities that will be created through establishing an exchange and
a clearing house—will benefit our own people?30
However, Muslims have ignored this obvious logic with regard to the
most fundamental commodity in the modern world, namely oil and its
derivatives. Thus, Edward J. Swan, for instance, after addressing some
of the economic benefits of derivatives in oil trading observed:
However, it is clear that these advantages are not being exploited in the
market of all the countries that produce or consume this important com-
modity. Indeed the benefits that flow from the derivatives trading are
concentrated in a very few countries. The principal exchanges for trad-
ing energy are in New York, London and Singapore. Other off-exchange
28
See Yeo Hwee Ying, “The Kuala Lumpur Commodity Exchange (KLCE) Case Study
of the Crude Palm (CPO) Futures Market,” Singapore Conferences on International Busi-
ness Law, Conference 3: Current Development In International Securities, Commodities
and Financial Futures Markets, Shangri-La Hotel, Singapore, Organized by the Faculty
of Law National University of Singapore, Part two, p. 213.
29
Dato Bek Neilsen, International Symposium on Commodity Futures Trading,
Kuala-Lumpur 21–22 October, 1980, p. 8.
30
See Doreen Soh, Invest in Commodities, Gold and Currencies, Times Books Inter-
national, Kuala Lumpur, 1995, p. 10.
138 chapter five
markets flourish in London, the US and various countries in Europe

and have following in countries of the Far East. However, many of the
producing countries, particularly in the Middle East and Latin America,
seem to be excluded from the benefits that the derivatives trading in oil
can bring. This situation cannot remain indefinitely. It must be becom-
ing increasingly clear to those in economic decision making positions
in producing countries that there are substantial benefits, in terms of
both increased revenue and control over pricing and distribution which
derivatives trading produce. It can only be a matter of time before they
seek to obtain these benefits for their own economies.31
Based on the above, it is clear that the establishment of an Islamic
derivative exchange for oil trading is a necessity given the fact that the
majority of the members of the organization of oil producing countries
(OPEC) with the exception of Venezuela are Muslim countries.32
On the other hand, considering the fact that Islamic financial insti-
tutions could not invest in currency, bonds, and other interest-based
markets, establishing the permissible part of a derivatives commodities
market will definitely open a wide range of investment opportunities
for these financial institutions.
Some of the economic benefits that have encouraged the Malaysian
government to establish the Kuala Lumpur Commodity Exchange are
the growing need of the industry for a market for the purpose of price
discovery after realizing the inefficiency of the old system. In the past,
local traders in Malaysia had to rely on the quoted price of related
commodities in distant terminal markets in Rotterdam, London, and
Chicago. Moreover, a local exchange provides hedging facilities to market
participants against the vagaries of price fluctuations. Before that, local
palm oil traders had to rely on soybean futures for hedging purposes.
Malaysia’s previous reliance on foreign futures market might have led
to inefficient price transmission (due to the distance factor), irrational
production, and stockholding decisions.33
Moreover, by setting up her own futures market, Malaysia will earn
much foreign exchange from foreign sources in the form of deposits
margin and brokerage commissions. Conversely, the remittance of such
31
Edward J. Swan (ed.), Derivatives Instruments Law, Cavendish Publishing Limited,
p. 87.
32
See the weekly news magazine, Times, October 9, 2000, vol. 156, no. 14, p. 40.
33
Fatimah Mohd, Arshad and Zainalabidin Mohamed, “The Efficiency of the Crude
Palm Oil (CPO) Futures Market in Establishing Forward Prices,” The Malaysian Journal
of Agricultural Economics, vol. 8, December, 1991, p. 26.
monies overseas by local investors trading on futures markets outside

the country will also be reduced.34
Furthermore, it serves to promote Kuala Lumpur as a viable center
for the conduct of international trade in commodities. Bearing in mind
that Malaysia and the ASEAN region in general produce many of the
commodities fundamental to the needs of mankind, it is logical therefore
that these commodities are traded on terminal markets at the origin
rather than in the center of consumption. Thus, the establishment of
an exchange in Kuala Lumpur will alter the balance of power in the
market place and restore to the producer a meaningful role in the price
determination process.35
The Clearinghouse and the Futures Market
One of the most important organizations of futures exchanges is the

clearinghouse. In centralized marketplace trading where contracts are
standardized and executed continuously throughout the day at great
speed, there is a need for an organization to record transactions. Fur-
thermore, the confidence of all parties that the contractual obligation
entered into by buyers and sellers will be honored is crucial to the
success of the futures market system.
In some futures exchanges the clearinghouse is an integral part of
the exchange and members of that exchange provide the guarantee of
financial performance mutually. In other exchanges the clearinghouse
is an independent company and the guarantee fund is provided by the
share capital and reserves of that company. The present study will take
as an example the structure and functioning of the Malaysian Deriva-
tives Clearing-House (MDCH), which is an independent entity. It is a
limited liability Company incorporated under the Company Act.
The clearinghouse in relation to the futures market is defined in the
Futures Industry Act as a company or an association or organization
34
See Yeo Hwee Ying, “The Kuala Lumpur Commodity Exchange (KLCE) Case Study
of the Crude Palm (CPO) Futures Market,” Singapore Conferences on International Busi-
ness Law, Conference 3: Current Development In International Securities, Commodities
and Financial Futures Markets, Shangri-La Hotel, Singapore, Organized by the Faculty
of Law National University of Singapore, Part Two p. 212.
35
See ʿAbd. Rahīn Aki, “Tin and the Kuala Lumpur Commodity Exchange,” Inter-
national Symposium on Commodity Futures Trading, Kuala-Lumpur, 21–22 October,
1980, p. 1.
140 chapter five
forming part of the futures exchange that clears, settles, and registers
futures contracts; and it makes adjustments to the contractual obliga-
tions out of those futures contracts.36 Clearing house facilities in relation
to futures market include any one or more of the following in relation
to the futures contracts traded on that futures market: (a) matching
of trades; (b) registration; (c) settlement; (d) guaranteeing or being a
counterparty; and margining.37
The evolution of the Malaysian clearing system started with the Kuala
Lumpur Commodities Clearing House Sdn Bhd (KLCCH), which was
incorporated in June 1980 as a joint venture between International
Commodities Clearing Holding of London and several leading banks in
Malaysia. From its inception until 1984, the KLCCH was independently
and separately run from the KLCE. Upon revamping in 1985 after the
crisis, it was decided that an independent clearing system would not
be in the best interest of the industry and hence the Malaysian Futures
Clearing Corporation (MFCC) was established. This new clearinghouse
is structurally different from its predecessor in that the KLCE and the
clearing members own seventy percent of its equity.38
The clearinghouse serves several important functions, such as the
registration of the different contracts concluded, substitution of counter-
parties, guarantee of performance, settlement of contracts, management
of physical delivery, and monitoring of members’ positions. Thus, the
MFCC progressively records the deal being concluded on the trading
floor by means of a trading slip signed by both the buyer and the seller.
The deals are processed overnight and the next morning a statement is
issued to each clearing member detailing the trades registered in their
account. Once the clearinghouse accepts the contract for registration,
it will substitute itself as the counterparty to the contract. It becomes
the buyer to the seller and the seller to the buyer. This is important in
facilitating the settlement of contracts and the buyer will have a contract
with the clearinghouse to purchase the commodity and the seller will
have a contract with the clearinghouse to sell the commodity. This func-
tion, termed novation, is one of the distinguishing features of exchange
traded futures and options markets.39
36
Futures Industry Act, 1993, p. 2.
37
Futures Industry (Amendment) Act 1995, p. 3.
38
See Yeo Hwee Ying, “The Kuala Lumpur Commodity Exchange (KLCE) Case
Study of the Crude Palm (CPO) Futures Market,” p. 219.
39
Rodney Parker, “Clearing and Guarantee Function,” Commodity Futures Course,
Given that the performance of the contract is deferred to future dates

and the parties have not paid for those obligations if we exclude the
margin, which is about five percent, there is a need to guarantee the
performance of the contracts so that parties could trade freely with-
out having to concern themselves about the credit worthiness of their
counterparties or the ability of their members to fulfill their contractual
obligations. The clearinghouse also monitors clearing members’ posi-
tions daily to ensure that they are not extending themselves by building
up large positions that they would have difficulty serving or that could
pose dangers to the market as a whole. Thus, it ensures that the clear-
ing members have adequate liquidity to meet potential margin calls as
and when required.40
The above functions of the clearinghouse, such as the registration of
the different contracts concluded, settlement of contracts, management
of physical delivery, and monitoring of members’ positions, are largely
administrative issues designed to facilitate the smooth running of the
market. Obviously, there is no clear objection to these functions from
an Islamic point of view and they could be adopted under the concept
of maṣlaḥ ah. However, substituting the counterparties in the contract
involves a contractual matter but could also be accommodated under
the concept of al-wakālah bi ʾajr (agency with determined fee). The
clearinghouse substitutes both the buyer and the seller in the contract
and guarantees its performance.
It is very important that the different institutions supervising and
regulating the futures market collaborate and coordinate their acitivities
in order to avoid any excessive speculation.
Hedging and the Futures Market
A hedge may be defined “as the opening of a futures position opposite

to that held in the physical commodity.”41 A hedger on the other hand
is a person who typically engages in the production, distribution, pro-
cessing, storing or consumption of actual commodities. The hedger uses
Organized by Commodities Trading Commission, 14–18 March, 1995, Kuala Lumpur,

p. 23; Security Commission, Malaysian Futures and Options: Regulations Module 1, p. 17.
40
Ibid.
41
T.H. Stewart (ed.), Trading in Futures, Woodhead-Faulkner, fifth edition, New
York, 1989, p. 19.
142 chapter five
the futures markets to minimize the risk of losses from price changes
inherent in owning the commodities. Generally, a hedger assumes a
position in the futures market which is in opposition as well as equal
to what he already holds in the physical market.42
In contrast, a speculator does not have any ongoing commercial
interest in the physical commodity. A speculator is one who is willing
to take risks by speculating on the future course of prices. A specula-
tor is solely motivated by profit and will generally not be interested in
using the commodities in which he trades.43
In free market economies the prices of many primary goods fluctuate
with the demand and supply conditions. Prices are also affected by the
transportation and storage of the commodity during its physical distri-
bution. Hedging plays an important role as a tool of risk management.
It is a process used to minimize commodity marketing and processing
losses that arise due to adverse price fluctuations.
A producer (farmer or mining company), a processor, or a consumer
may all need to ensure themselves against unforeseen fluctuations in
the price of raw materials which they sell or use as the basis of their
business; an exporter/importer may additionally want to ensure his
safety from currency fluctuations that might adversely affect his profit
margins. In all these cases, the speculator acts as the counterparty to
accept the risk in the hope of making a profit by predicting the trend
of the market. For example, for a farmer who is growing corn and is
planning to sell it in six months, the price may be either lower or higher
than what he expects now or anticipated when he planted his corn. If
the price turns out to be significantly lower, the farmer may be forced
to sell the corn at a price that does not even the cover production costs,
which may end in bankruptcy. If, on the other hand, the price turns out
to be higher, the farmer would make unexpected profits.44
Alternatively, an airline company may wish to set passage fares that
will remain fixed for long periods of time. To fix a profitable rate of
fares, they must estimate their expected costs. However, they are at the
same time subject to suffer the risk of unexpected rise of cost that may
squeeze profit margins. The cost of jet fuel for a typical carrier accounts
42
See David A. Chaikin and Brendan J. Mother, “Commodity Futures Contracts
and the Gaming Act,” Lloyd’s Maritime and Commercial Law Quarterly, (1986) 2, pp.
391–392.
43
Ibid.
44
See Franklin R. Edwards and Cindy W. Ma, Futures and Options, pp. 102–103.
for about seventeen percent of the total expenses. A one per cent per
gallon rise in jet fuel prices, therefore, increases costs substantially and
can have a significant effect on earnings per share. Thus, the farmer and
the airline carrier are both exposed to price risks.
The ultimate goal of any business is, of course, to make profits. It is
only the price variation in output and input that brings about varia-
tion in revenues and costs. Changes in sales revenue can occur either
because of changes in prices or because of changes in the quantity sold.
For example, the above farmer may have anticipated growing 500,000
bushels of corn, but due to unfavorable weather conditions managed
to harvest only 300,000 bushels. Thus, even if he correctly anticipated
corn prices, he would still find his sale revenue drastically reduced. This
type of risk is called quantity risk and it cannot be hedged with great
precision, whether through futures, options, or any existing forward
instruments. So it should be kept in mind when designing a hedging
strategy.45
Addressing the issue, many Muslim scholars maintained that hedg-
ing is valid from the sharīʿah point of view because it allows traders to
hedge themselves against unforeseen price fluctuations. That is why it
was upheld by the participants in the Sixth al-Barakah conference that
hedging is permissible if the issue of contract is permissible.46
Speculation and the Futures Market
The issue of speculation is one of the reasons cited most frequently to

invalidate futures contracts. The issue is a problem not only in Islamic
finance. It is also a controversial matter in the conventional system. It
is sometimes difficult to distinguish between hedging (a needed factor
to manage risk) and speculation, which is generally connected with
crises and market crashes. A similar confusion exists between specula-
tion and investment. Speculation is also connected with gambling. But
what aggravates the situation is the fact that a limited level of specula-
tion is not only desirable but is a necessity for the smooth functioning
of any exchange. Thus, eliminating speculation altogether, whether in
45
Ibid., p. 103.
46
See al-Fatāwā al-Iqtiṣādiyyah al-Ṣādirah ʿan Nadwat al-Barakah li al-Iqtiṣād
al-Islāmī, edited by Abd al-Sattār Abū Ghuddah and others, Dallah al-Barakah, Jeddah,
1995, p. 42.
144 chapter five
ordinary sales or derivatives markets, is impossible. Now the question

arises as to how and where to draw the line between this limited scale
of speculation and the unlimited one.
The primary purpose of a futures market is to facilitate hedging.
However, if there were hedgers in the futures market in order to ensure
a permanent balance between short and long hedgers, there would be
little need for speculators. But this is not the case. In most markets,
hedgers tend to concentrate on one side of the market, either long or
short, but for the market to function, both long and short positions
must exist. Thus, in a market without speculators, hedging would be,
at least, very difficult and at the worst impossible.
Addressing the issue, Kamāli wrote:
Defining speculation or identifying the speculator is always difficult and
many have stated that no clear definition can be given. This is because
the distinguishing line between investment, speculation, and gambling
are not always clear, and ambiguity tends to persist regardless of defini-
tion. What can be said, however, is that speculation deals in risks that are
necessarily present, but gambling creates the risk that would otherwise
be nonexistent.47
Another scholar who addressed the issue of speculation in a futures
market is Fahīm Khān. He divided the forms of speculation into two
kinds: the first kind of speculation is unrelated to any real activity and
is meant to be merely a financial or monetary transaction or a nonpro-
ductive exchange. It is simply a way of making good guesses with no
intention of receiving or delivering. This kind of speculation, according
to Fahīm Khān, is unacceptable, while a second form of speculation is
considered acceptable. The second kind occurs when speculation, a part
of some real activities, helps to shift risks from the producers unable
to bearing all the risk, to those who can afford to bear it. Moreover,
according to Fahīm Khān, speculation (a part of a deal to provide
liquidity to farmers to increase the volume of their production) will
also be a desirable and permissible activity despite the fact it involves
speculation in futures prices.48
From the two kinds of speculators identified by Fahīm Khān, one
may ask if the acceptable form of speculation is only that which will
47
Kamāli, “The Permissibility and Potential of Developing Islamic Derivatives as
Financial Instruments,” IIUM Journal of Economics & Management 7, no. 2, 1999, p. 77.
48
Fahīm Khān, Islamic Futures and Their Markets, p. 46.
allow farmers and producers to shift their risk to those who would be
ready to bear these risks? And is it possible to have an Islamic futures
market with only hedgers? However, Fahīm Khān did not explain how
to differentiate between his two kinds of speculators except by the sug-
gestion that they will have to establish that they are bona fide traders/
producers and would deal in real goods and services and would not
merely gamble.49
Some other scholars have tried to make the distinction between
speculation and games of chance on the grounds of the availability
of information. Therefore, it is only in the absence of information or
under uncertainty that speculation is akin to a game of chance and is
reprehensible. This suggests that speculation is a process that relies on
the analysis of a lot of economic and financial data, companies’ financial
reports, information about management skill and aptitude as well as the
personal profile of decision makers. All this information is analyzed
before a decision is taken.50
Nevertheless, the issue seems to be not totally out of hand. A well-
regulated market might reduce speculation to an acceptable level. Thus,
some scholars have come up with some propositions on how to curb
speculation. While suggesting some possible means to curb specula-
tion, Hussin Salamon, for instance, maintains that speculative business
instruments must be excluded from the Islamic model. These include,
he suggested, margin trading, short selling, market rigging, manipula-
tion, cornering, and rumor and options trading. Moreover, he observed
that to differentiate between speculation and investment is not easy. The
word investment connotes that the arrangement will continue for a long
time and that the principal is safe, while speculation connotes speed
and high risk. Thus, he suggested that the appropriate time duration
for share holding, for instance, should be six months while it would be
ideal if a one-year period could be considered.51
However, given the fact that time and risk are relative, any suggested
period is relative. For example, a sum of money is used to buy a house
with the intention of renting it out and selling it when the price rises
49
Ibid.
50
Aḥmad Abdel Fattah, “Toward an Islamic Stock Exchange in a Transitional Stage,”
p. 82; Mohammed Obaidullah, “Islamisation and Stock Market Efficiency,” New Horizon,
July, 1997, p. 10.
51
Husein Salamon, “Speculation in the Stock Market from the Islamic Perspective,”
p. 43.
146 chapter five
in, say, two years time. To one person, this activity is an investment, as
two years are long term in this reckoning of time; another person may
view this as speculation, since he interprets long term to be ten years
or more.52 Moreover, imposing a period for holding the commodities or
shares before reselling them will definitely create a problem of liquidity
even for genuine traders. Hussin Salamon, for instance, advanced some
suggestions; however, the practicable dimensions of those suggestions
might carry with them some problems. He observed that
An urgent need for cash by genuine investors for their personal spending
could be met through several ways. First through various welfare funds
operating within the Islamic environment such as from zakah (compulsory
charity) bayt al-māl (treasury of the state) and qarḍ ḥ asan (welfare) fund.
Second, every company could organize its own fund to cater to investors’
emergency need for cash. Third, if the above ways are not available, the
authority (or a special committee could be established by the authority to
handle such a problem) of the alternative model is responsible to verify the
genuine nature of the investors’ need. If it is genuine, the investors should
be allowed to liquidate their shares, while having to pay the tax.53
It is worth noting that zakah will definitely not be used to manage market
problems. Similarly, it is difficult to imagine anybody or organization
that will provide qarḍ ḥ assan for the market without any return.
Another commentator went to the extent of saying that to curb specu-
lation we have to look at people’s intentions because to be a shareholder
in an Islamic company one must have a real intention and not a virtual
one (shaklī).54 However, this argument is opposed by other scholars who
consider the issue of intention as impracticable and moreover it is not a
sharīʿah requirement that a person should perform a niyyah (religious
intention) before concluding a sale contract.55
Similarly, Aḥmad Muḥyī al-Dīn was very critical of speculation. After
raising doubt about the economic benefits of speculation and hedging
as means for price discovery and liquidity, Muḥyī al-Dīn maintained
52
See Doreen Soh, Invest in Commodities, Gold & Currencies, p. 14.
53
Husein Salamon, “Speculation in the Stock Market from the Islamic Perspective,”
p. 44.
54
See Saif al-Dīn Ibrāhim Taj al-Dīn, Naḥwa Namūzaj Islāmī Lisūq al-Ashum, Journal
of Research In Islamic Economics, King ʿAbd al-Azīz University, Saudi Arabia, vol. 3
no. 1, 1985, King ʿAbd al-Azīz University, Saudi Arabia, p. 61.
55
See Muhammad ʿAbd al-Halīm Omar, “Al-Jawānib al-Sharʿiyyah al-ʿĀmmah Li
al-Sharikāt al-ʿĀmilah fi Majāl al-Awrāq al-Māliyyah,” al-Iqtiṣād al-Islāmī, Dubai, no.
204, March 1998, p. 810.
that speculation has many bad economic repercussions. 56 He also

argued against speculation from the legal or sharīʿah perspective, and
it is this line of argument that will be the focus of our discussion here.
He differentiated between speculation based on spot transactions and
speculation based on futures contracts. Regarding the first kind of
speculation, after considering the numerous advantages of the stock
exchange, Muḥyī al-Dīn acknowledges the fact that there is no other
way to have a viable and liquid market without having some people who
are looking for price differentials in order to activate the market and
to provide liquidity to the participants. However, the issue, according
to Muḥyī al-Dīn, needs to be regulated.57
Aḥmad Muḥyī al-Dīn maintains that speculation based on futures
contracts where there is no physical delivery should be declared illegal
because the parties have no real intention of concluding a sales contract,
and the action of the parties for offsetting their transaction rather than
taking physical delivery is an indication of that. Moreover, such trans-
actions are a kind of gambling and the parties are calling it a sale just
as a form of hīlah (legal trick). In addition, this kind of sale is similar
to bayʿ al-ʿīnah, where the parties do not intend to carry out a real sale
but wish to make a loan with usury in the form of a sale. Furthermore,
this kind of sale is in direct contradiction with the objective of sharīʿah
insofar as a sale should exchange countervalues or at least one, which
is not the case in the above transaction. Finally, such sales should be
prohibited based on the principle of blocking the means (sad al-dhrāiʿ ).
Muḥyī al-Dīn singles out futures contracts as one of the main fields of
speculation because traders are reselling before taking possession.58
First of all, looking at Muḥyī al-Dīn’s definition of speculation, it is
clear that it is not directed precisely to speculation as it is, or even to the
issue of looking for price differentials, but to the different contracts used
for speculation and price differentials. Thus, he concluded by legalizing
speculation if the contract is executed on the spot but making it illegal
if the contract is for future execution. Therefore, it could be argued
that if the legality of speculation is directly associated with the type of
56
See Aḥmad Muhi al-Dīn, Aswāq al-Awrāq al-Māliyyah wa Athāruhā al-Inmāiyyah
fi al-Iqtiṣād al-Isālmi, Dallah al-Barakah, Saudi Arabia, 1996, pp. 479–521.
57
Ibid., p. 606.
58
For a full account of these objections, see Aḥmad Muhi al-Dīn, Aswāq al-Awrāq
al-Māliyyah wa Athāruha al-Inmāʾ iyyah fi al-Iqtiṣād al-Isālmi, pp. 579–607.
148 chapter five
contract used, it will be better to discuss Muḥyī al-Dīn’s argument on

speculation by analyzing his stand on futures contracts.
For instance, he maintains that one of the factors in futures contracts
leading to speculation is that traders are reselling what they have bought
before taking possession. Such an exchange is illegal in the sharīʿah,
according to Muḥyī al-Dīn, except for the Mālikis who confine such
prohibition to foodstuff. Rejecting the Mālikis opinion, Muḥyī al-Dīn
argues that the evidence is general and includes everything sold before
taking possession.
As it will be elaborated in the next chapter, the evidence about the
issue of sale before taking possession has been the subject of differences
of opinion among early scholars, where destruction of the commod-
ity before taking of possession is possible. However, this is not the
case nowadays and therefore, the maxim that the ruling of any case is
associated with the presence of cause or ʿillah (al-ḥ ukmu yadūru maʿ
ʿillatihi wujūdan wa ʿadaman) will apply. On the other hand, Muḥyī
al-Dīn’s analogy between futures transactions and bayʿ al-ʿīnah (selling
of something to someone at a given price on credit and then buying it
back from him at the same time for a lower price) carries a discrepancy.
In bayʿ al-ʿīnah the possibility of ribā is clear, while it is not the case in
futures transactions. This is illustrated by the fact that in bayʿ al-ʿīnah
one of the parties is in need of a loan which he fails to obtain through
legal means and, therefore, resorts to bayʿ al-ʿīnah in order to get it.
However, in the futures market no participant is interested in getting
loans and, even if he has such an intention, it will never materialize
since the futures market is not a place for raising loans. It is meant for
managing business risks.
It should be noted that the present study holds the view that the exces-
sive form of speculation must be eliminated from any possible Islamic
market. However, the limited form of speculation or the issue of just
looking for price differentials is necessary and cannot be eliminated if
we want the Islamic market to perform its functions.
Bearing this necessity in mind, perhaps some scholars have rejected
the idea that a genuine Muslim investor should keep the share he bought
for a long duration, six months as suggested by some. They maintained
that there is nothing wrong in trading shares for the purpose of looking
for price differentials based on the principles of freedom of transaction,
which do not put restrictions on the time of holding a specific com-
modity before reselling it, or of a minimum or maximum percentage
of benefit before reselling it.
Thus, a person may buy the shares of a specific company, although

he is not concerned with its overall performance, with the expectation
of the actual movement of share prices. It may happen that the overall
performance of the company this year may not be good but its shares
may suddenly rise due to new investment opportunities concluded by
the company or other internal or external factors. Thus, the investor
who is looking just for price differentials may benefit, although the main
shareholders of the company who are looking for its overall performance
may lose due to its poor performance throughout the financial year.
And the opposite scenario is also possible.59
Similarly, the Islamic Fiqh Academy in its discussion about the zakah
of shares differentiates between the zakah of shares (wherein the inves-
tor is a shareholder of the company) and the situation in which he is
buying shares in order to sell whenever there is a price rise.60 This dif-
ferentiation is a kind of implicit rejection of the opinion that traders
should keep the shares they have bought for at least six months or for
a longer time before liquidating them, confirming, simultaneously, the
legality of looking for price differentials.
On the other hand, while rejecting the idea that investors must keep
their commodities for a period before liquidating them, Akram Khān says:
Some writers have suggested that to check speculation the Islamic economy
should make it compulsory that people hold the investment for specified
period of time before liquidating it. We think it is not only overly restric-
tive but also unnecessary.61
Thus, as it is rightly stated by Mohammad Akram Khān,
Speculation is a mental activity in which a person formulates his judg-
ment about future course of the market. In every day life, most of us
speculate about different economic events. Therefore, in its strictly literal
sense, there is “nothing” objectionable about speculation in the Islamic
framework. In fact, no law can be enforced against speculation, as prima
facie, it involves lawful activities of buying and selling.62
59
Al-Zuahili, Bayʿ al-Ashum, Dār al-Maktabi, Damascus, 1997, pp. 33–34; Muham-
mad al-Mukhtār al-Salāmi, “al-Mutajarah Bi Ashum Sharikat Gharaduhā wa Nash’atuhā
Mubāh Lakinnahā Tuqrid wa Taqtarid Bi Fāʾidah”, ʿAmāl al-Nadawh al-Fiqhiyyah
al-Khāmisah, Bayt al-Tamwīl al-Kuwaiti, Kuwait, (2–4 November, 1998), p. 23.
60
Majmaʿ al-Fiqh al-Islāmī, Qarārāt wa Tawṣiyāt (1985–1988), al Dawrah al- Rābiʿah
Qarār no. 3 Zakāt Ashum al-Sharikāt, pp. 61–62.
61
Muhamad Akram Khān, “Commodity Exchange and Stock Exchange in Islamic
Economy,” American Journal of Islamic Social Sciences, vol. 5, issue. 1, 1988, p. 101.
62
Ibid.
150 chapter five
Speculation and Financial Crises
Many commentators have tried to link the occurrence of crises with

speculation. The two crises generally cited in this regard by some Mus-
lim writers and which occurred in Muslim countries are the market
crash in Kuwait in 1984 and the financial crisis in South East Asia in
1997.63 We have also besides these two major crises, the crisis of the
Kuala Lumpur Commodity Exchange in March 1984. Business is
not successful all the time. Failure and loss are unavoidable. However,
these problems may occur due to ordinary market movement as well
as due to excessive speculation or due to market structure and weaker
supervision.
Before addressing the claim of a link between the two crises cited
above and speculation, we may refer first to the causes behind the crisis
of the Kuala Lumpur Commodity Exchange in March 1984 and how
a market can be rocked not because of speculation but due to other
factors, such as a lack of adequate licensing, ineffective supervision, a
lack of decisive management and control, or malpractices. A necessary
requisite for the orderly and healthy development of any commodity
futures market is the provision of proper regulations protecting the
interests of investors. Such regulations should ensure that they are
doing business within a system that possesses adequate measures against
fraudulent or irresponsible practices, and should ensure the observance
of high standards of conduct.
Thus, the above defects contributed, in one way or another, to the
1984 crisis in the Malaysian commodity market. Regarding the issue of
licensing for futures dealers, brokers, and advisors, there are no profi-
ciency qualifications spelt out in the Commodities Trading Act of 1980.
Section 27 of the said act sanctions the refusal of registration of dealers
and brokers who are not “fit and proper” persons, who have been con-
victed of criminal offences, or who are undischarged bankrupts. Thus,
it seems that the criterion of competence has been put aside. There is
no requisite whatsoever regarding education, training, and examination
that enables the dealers and brokers to effectively represent and safe-
guard their clients’ interests. In addition, under the 1980 regulation the
63
See, Husein Salamon’ paper “Speculation In the Stock Market form the Islamic
Perspective”, pp. 17–18; al-Iqtiṣād al-Islāmī, “al-Mudārabāt al-Ribawiyyah Warāʾ Azmat
al-Būrṣah” (Conference report), issue no. 202, September 1997.
Commodities Trading Council was appointed to supervise the trading

in commodity futures. However, the regulation of the clearinghouse fell
outside the jurisdiction of the Commodities Trading Council. This was
rather strange in view of the fact that the clearinghouse was supposed
to operate in tandem with the exchange and was in fact an integral
component of the entire commodity futures system. Moreover, there
is no provision to control excessive speculation. The only provision in
this regard was that the Minister could establish and fix trading and
position limits. However, the government was reluctant to intervene
in such a self-regulatory industry, as the thinking was that the trading
floor should be allowed to be free.64
Similarly, there was a problem of management and control. In an
industry that trades on volatility and uncertainty, prolonged deliberation
over management decisions is certainly detrimental to the health of the
market. In the beginning, the rules and regulations were deliberately
relaxed to attract investors, as is typical for any new market. As such,
no position limits were imposed, which meant that the potential existed
for anyone to overtrade, so as to influence price trends.
Given the above loopholes, from the latter half of 1983 the market
became very volatile and by January 1984 the problem of excessive
speculation was acute; but still, the KLCE did not tighten its rules
even after being notified that a single trading firm was holding about
sixty-eight percent of the open positions. At this juncture, the KLCE
ought to have invoked Trading Rules 408 and 409, which would have
enabled it, after consultation with the KLCCH, to impose trading and
position limits. Instead, the market manipulation continued unchecked
and was, in fact, aggravated by the lack of coordination between the
KLCE and the KLCCH. The working relationship between these two
institutions was strained. Both of them found it difficult to get the other
to agree to some form of concerted action. Finally, many malpractices
also contributed to aggravate the situation.65 Thus, it is clear from the
above case that a market may crash not because of speculation but due
to other factors.
Regarding the effects of speculation in the recent economic crisis
in Malaysia and around the region in 1997, currency speculation did
64
For more detail, see Yeo Hwee Ying, “The Kuala Lumpur Commodity Exchange
(KLCE) Case Study of the Crude Palm (CPO) Futures Market,” pp. 229–232.
65
Ibid.
152 chapter five
indeed play a role in aggravating the situation. However, according to

the Malaysian Institute of Economic Research there were many emerg-
ing signs that proved disturbing to the Malaysian economy even before
the crisis. These signs are summarized bellow:
• Economic growth above trend or potential output: The growth of

the economy has been consistently above what is deemed as its poten-
tial growth since 1991. In 1996, it was estimated that the actual GDP
was about six-to-ten percent above the potential output. If an econ-
omy is to grow at a rate above its potential growth path in the longer
term, it has to improve its efficiency in utilizing outputs. However,
the reverse seems to have occurred in the Malaysian economy.
• Loss of efficiency in the economy: The presence of misallocation of
resources as indicated by the growth trend of Total Factor Productivity
(TFP) and the incremental capital output ratio (ICOR) computation
of TFP growth over the years showed a declining trend, and the 1997
estimate of TFP was negative. The contribution of the TFP growth
to overall growth in the economy correspondingly declined. Growth
was instead driven primarily by capital stock accumulation.
• Current account deficit: The steep depreciation of the ringgit and its
continued volatile exchange rate was the result of several interrelated
factors. Some of these, especially the contagion effect of adverse
regional economic developments, are beyond the control of policy
makers. However, the deficit in the current account balance was a
source of concern.
• Excessive credit expansion especially to nonproductive sectors:
The total annual loans growth had been rising at a fast pace since
1995. The monthly total loans growth (year on year) rose to a wor-
risome level of close to thirty per cent in 1997 peaking at a thirty
percent growth in June 1997. In March 1997, due to excessive loans
extended by the banking system, the central bank imposed quantita-
tive restrictions on the amount of loans to less productive sectors,
defined to include the broad property sector, consumption credit,
and loans for the purchase of stocks and shares.66 Moreover, based on
66
For more detail, see Mohamed Ariff and others, Currency Turmoil and the Malay-
sian Economy—Genesis, Prognosis and Response, Malaysian Institute of Economic
Research, Kuala-Lumpur, 1998, pp. 2–8.
some economic analyses, it is believed that the ringgit appeared to be

overvalued by some fifteen-to-twenty percent when the crisis started.67
Besides these factors, many other factors contributed to the 1997 crisis
as the Malaysian Institute of Economic Research concluded in its study
that stated:
Currency speculators have no doubt contributed to the present turmoil in
financial markets. This has resulted in the ringgit depreciating excessively.
However, it is to be noted that speculators would not have succeeded had
there been no weaknesses in the micro and macroeconomic fundamentals
in the first place.68
On the other hand, it should be noted that the speculation in the 1997
crisis was basically a currency speculation which affected the banking
and other sectors of the economy.69 However, at the beginning of the
crisis, the commodity futures market in Malaysia represented by the
crude palm oil futures was almost unaffected until the imposition of
capital control in 1998. Turnover on the Commodity and Monetary
Exchange of Malaysia’s Crude Palm Oil (CPO) Futures Market in 1998
was 353,539 contracts (including Exchange of Futures for Physical-EFP),
or approximately 8.84 million metric tons of crude palm oil compared
with 483,651 contracts or 12.01 million metric tons in 1997, a decline
of twenty-seven percent.
The average daily turnover for the first nine months of 1998 was 1,615
contracts. This, however, fell to 928 contracts per day in the last quarter
as a consequence of the imposition of capital measures in September. For
the entire year, average daily volume was 1,443 contracts compared to
1,958 contracts in 1997. The imposition of capital control had a negative
impact on the market as most of the foreign players closed their posi-
tions. This could be seen in the total open position which fell drastically
by 41.0 percent to 4,597 contracts from 7,785 in 1997.70
67
Ibid., p. 11.
68
Ibid., p. 29.
69
See Mohammad Obadyatullah, “Malaysia from Currency to Banking Crisis,”
Malaysian Journal of Economic Studies, Vol. XXXV, no. 1 & 2, Jun/ December 1998,
pp. 73–94.
70
See Commodity and Monetary Exchange of Malaysia, Update, “The Crude Palm
Oil Futures Market Overview for 1998,” Issue of January 1999, p. 1; Bank Negara, The
Central Bank and the Financial System in Malaysia-A Decade of Change, p. 385.
154 chapter five
Thus, it could be concluded that the recent economic crisis is the

result of different weaknesses in the Malaysian economy that existed
before the crisis and not just the result of a speculative attack, although
speculation worsened the situation. But to put all the blame on specula-
tion even in its restricted and regulated form is unwarranted. Moreover,
the speculation of the 1997’s crisis was mainly currency speculation.
However, as is elaborated in the first part of the present study there is
no possibility of a futures currency market in Islamic finance or the
possibility of using currency as a commodity for short investment.
Even the simple forward currency contract is unacceptable in Islamic
finance, although several Islamically acceptable tools have been proposed
at the beginning of this study in order to meet the need and demand
of genuine traders. Hence, allowing traders to invest or speculate in
currency forward, futures and swap contracts could be considered as
another weakness in the Malaysian financial system, which contributed
to the crisis if it is judged from an Islamic point of view.
Regarding the stock market crash in Kuwait in 1984, there are different
causes that can be mentioned. Although the preliminary symptoms of
the problem were evident as early as 1976, the crash itself occurred in
1984. The direct causes of the crisis can be summarized as follows:
1. The absence of active regulatory bodies, which could supervise the

market activities and control the implementation of its regulations.
Moreover, the central bank did not play its role effectively regarding
monetary policy.
2. The absence of transparency and reliable information about the status
of the listed companies due to the ineffective role of the accounting
and auditing agencies. This situation was contrary to the principle
that there is no right investment without right information.
3. Weaknesses in the brokerage industry regulation, which resulted in
inconsistency in prices. Moreover, there were no specific provisions
about the role of brokers, thus allowing a broker to trade for him-
self or for his client as he wished, since there was no regulation, no
supervision, and no association of brokers.
4. Trade in the market was limited to shares only with no other alterna-
tive to absorb liquidity. The lack of regulation prompted many people
to manipulate prices and be involved in excessive speculation.
5. There was no proper system of clearance, which would have guar-
anteed the rights of all parties.
6. The expansion of futures trading with a total absence of regulation

of such transactions also worsened the situation.71
Thus, it is clear that the crisis was not the result of speculation, but
rather of structural and regulatory weaknesses in the Kuwaiti Exchange,
its brokerage industry, its clearing system, and its futures industry
management.
Arbitrage and Speculation
Commodity arbitrage is the purchase of a commodity in one market

and the simultaneous sale of the identical commodity in another market
(having different prices) with the goal of profiting from the temporary
differences in prices in different markets.72
Distortion in price often results from factors that are not readily
quantifiable. For example, the opinions of traders having different infor-
mation at hand, or different interpretations of the same information may
result in price distortion. More commonly, such distortions occur when
there is a time difference between the trading hours of two or more
markets. If, for example, coffee closed at a simplified price of £2,300
per ton in the New York market and during the first few hours of the
morning session in London the following day, and before the reopening
of the New York market, the same price rose to £2,350 for whatever
reason, an arbitrage opportunity would be possible immediately after
New York market opens. By selling in London at £2,350 per ton and
simultaneously purchasing in New York for £2,300, a paper profit of £50
per ton would be secured. To realize the profit the positions need to be
reversed and offset against each other. The offsets are executed in each
market when prices move back into alignment. If, after the arbitrage
trade had been placed, the price settled at £2,325, the London ‘short’
position would yield a profit of £25 as would the closure of the New
York ‘long’ position.73
71
See Samir Abd al-Ghani Mahmud, “al-ʿAbāʿ al-Qawmiyyah Li Azmat al-ʾAwrāq
al-Māliyyah bi Dawlat al-Kuwait,” Majallat al-‘Ulūm al-Ijtimāiyyah (Jamiʿat al-Kuwait),
no. 14, vol. 1, 1986, pp. 13–34.
72
David County and Eric C. Betteheim, An Introduction Guide to the Commodity
Futures Markets, London, Butterworths, 1986, p. 86.
73
Ibid., pp. 86–87.
156 chapter five
In other words, it is the simultaneous purchase and sale of the same

commodity at a price which guarantees and assures profit. The delivery
of the commodity and realization of the profit may be made in the
future.74
Despite the fact that arbitrage is very similar to speculation, many
Muslim scholars have maintained that arbitrage is legal. Illustrating
the above case, Akram Khān reports the following example. Suppose a
wholesale egg dealer in Lahore notes that the price of eggs in Karachi
is so high that if he buys eggs in Lahore and ships them to Karachi,
he will still make a profit. He would buy eggs in Lahore and would
simultaneously sell them to some Karachi merchants. The deal in Lahore
would take place in the spot market. The Karachi deal would take place
in due course of time when the eggs are delivered in Karachi and the
money is received. The arbitrageurs make money out of the small price
differentials in the two markets. The economic role of the arbitrageurs
is that they stabilize the market in different trading centers.75
For another example of arbitrage, suppose a stock is bought for
$5.00 on the Paris Bourse (stock exchange) and simultaneously sold
for $5.25 on the New York Stock Exchange. It should be noted that an
arbitrageur must usually carry an inventory because all his sales can-
not be made simultaneously with purchases. The arbitrageur, therefore,
holds a speculative position and he cannot be easily distinguished from
a speculator.
Commenting on the above example, Manan maintains that while the
activity of the simple arbitrageur can be compared with a trader buying
in one market and selling in another, depending on the elasticity of
demand, it may have relative validity in sharīʿah. But in actual practice,
the arbitrageur can hardly be distinguished from the speculator.76
74
Muhamad Akram Khān, “Commodity Exchange and Stock Exchange in Islamic
Economy,” p. 97.
75
Ibid., 97.
76
See M.A. Mannan, “An Appraisal of Existing Financial Instruments and Market
Operation from an Islamic Perspective,” Developing a System of Financial Instruments
(proceedings of a seminar held in Kuala Lumpur, Malaysia, 28 April–5 May 1986),
edited by Mohamed Ariff and M.A. Mannan, Islamic Research and Training Institute
Islamic Development Bank, Jeddah, Saudi Arabia, p. 89.
Margin Trading and Speculation
One of the most advanced means of restricting speculation by Muslim

scholars in the stock market, in particular, is to ban the use of margin
trading. It should be noted that the concept of margin trading in the
futures market differs from that in stock trading. It is, in the context of
futures trading, the amount of money deposited by every holder of a
long or short contract with his or her brokerage house to guarantee the
performance of the contract.77 In the context of stock trading, it refers
to the amount of ownership the investor must have in each share he
purchases. The remaining amount is covered by a loan from the broker.
Interest is paid for such a loan and the stock is held by the broker as
collateral on that loan.78 The prevalent use of the margin in stock markets
is opposed by Muslim scholars on different grounds.
Addressing the issue, El-Gāri said:
The fact that borrowing with interest is involved in such transactions
clearly makes it void, since interest is ribā. But what if borrowing with
interest is not included? The transaction will remain unacceptable for two
reasons: first, it includes a loan that produces an obvious benefit to the
lender (albeit with no interest) that is holding the stock and using it in
other profitable transactions. The rule in the sharīʿah is that every loan,
which will benefit the lender, is ribā. Second, the transaction includes
two contracts. According to the rule in the sharīʿah combined contracts
void each other.79
It should be noted that futures margins differ from stock margin in
both concept and method of computation. Stock margins constitute a
partial payment to the brokerage house. The remainder of the price is
the amount of debt owed to the brokerage house on which interest is
charged. Futures margins, on the other hand, are actually good-faith
deposits to protect a broker against risk in the event of adverse price
moves in the interim period between the establishment of a position
and its liquidation either by delivery or by offset. Stock margins typi-
cally fluctuate in a range of fifty to ninety percent, although both limits
of this range have been exceeded for brief periods. Futures margins
77
New York Institute of Finance, “Futures: A Personal Seminar,” New York 1989,
p. 19.
78
Mohammad El-Gāri, “Stock Exchange Transactions: sharīʿah Viewpoints,” p. 168.
79
Ibid.
158 chapter five
are based on fixed minimums per unit such as ounces, pounds, tons,
or face values of financial instruments established by the exchanges,
but an individual broker may require a large amount if he believes the
minimum involves undue risks for themselves or their clients. Moreover
it should be noted that futures prices frequently remain in quite narrow
ranges for long periods and are not more volatile than typical securities
prices in a similar price range.80
Thus, the three reservations raised by Muslim scholars regarding
the use of margins in securities trading, namely, the issue of interest
rates, the use of margins involving loans that benefit the lender, and
the margin as a kind of combined contract, are not present in futures
commodity trading.
80
Richard J. Teweles, Frank J. Jones, The Futures Game: Who Wins? Who Loses? And
Why, ed. Ben Warwick, McGraw-Hill, New York, pp. 21–22.
CHAPTER SIX
SALE PRIOR TO TAKING POSSESSION, SALE OF DEBT

AND FUTURES CONTRACT
One of the objections to the futures contract is that it involves sale prior
to taking possession. The majority of scholars of the different schools of
Islamic law held that sale prior to taking possession is illegal. Moreover,
most contemporary Muslim scholars have followed in the footsteps of
the majority of early scholars by stressing that sale prior to taking pos-
session is illegal, overlooking the difference of opinions on the issue,
on one the hand, and not analyzing the changing circumstances and
their relevance to the issue on the other. Thus, the two prominent Fiqh
Academies, namely the Jeddah- and Makkah-based, passed negative
judgments on futures contracts and one of their main arguments is that
it involves sale prior to taking possession.1
Juristic Debate over Sale prior to Taking Possession
The juristic debate over the issue is based on several aḥ ādīth reported
from the Prophet (PBUH) stating that “He who buys foodstuff should
not resell it until he receives it.”2 It is also reported that the Prophet said,
“He who buys foodstuff should not resell it until he is satisfied with its
measurement.”3 It is also reported that Ibn ʿUmar said: “At the time of
the Prophet (PBUH) we used to trade on foodstuff. Then, the Prophet
(PBUH) sent to us a person to order us not to resell it unless we move
it to another place.” It was also reported that Ḥ akīm Ibn Ḥ izām asked
the Prophet (PBUH) saying, “I am making different deals, what is legal
for me to do and what is not?” Then the Prophet (PBUH) advised him
1
See Al-Majmaʿ al-Fiqhī al-Islāmī li-Rābiṭat al-ʿĀlam al-Islāmī, Qarārāt Majlis
al-Majmaʿ al-Fiqhī, al-Islāmī, seventh session, from 11–16 Rabiʿ al-ʾĀkhir, 1404 “Sūq
al-ʾAwrāq al-Māliyyah wa al-Badāiʾi (al-Burṣah)” pp. 120–124; Islamic Fiqh Academy’s
resolution no. 64/17 Majallat Majmaʿ al-Fiqh al-Islāmī, 1992, no. 7, vol. 1, p. 398.
2
Saḥ īḥ Muslim, vol. 10, p. 169.
3
See Saḥ īḥ al-Bukhāri with Fatḥ al-Bārī, Book of Sale, vol. 4, pp. 349–350, ḥ adīth
no. 1525 and the following aḥ ādīth.
160 chapter six
saying, “If you buy something do not resell it until you receive it.”4 It is
also reported by Zaid Ibn Thābit that the Prophet (PBUH) prohibited
the sale of commodities which were bought from other traders until
the commodities were relocated by the buyers to their own places.”5
From these aḥ ādīth, Ibn ʿAbbās concluded saying “I think it applies to
other things as well.”6
This opinion has also been followed by the Shāf ʿī jurists maintaining
that it is illegal to resell anything before receiving it or taking possession
of it, whether it is foodstuff or otherwise. They based their opinion on
the literal meaning of the above aḥ adīth. In addition, they argue that
since the commodity is not transferred to the buyer, the seller will still
be liable for any destruction or loss that may affect the buyer. Moreover,
if the buyer resells it to a third person, and the third person to a fourth,
it would be a chain of liability, which might be the source of gharar.7
The second opinion is the Ḥ anafī view. They maintain that it is illegal
to resell anything before receiving it or taking possession of it unless it
is a real property. They argue that reselling anything before receiving
it is a kind of gharar, since the commodity bought may perish or be
destroyed before the buyer receives it and as a result the seller may not
be able to deliver it to the new buyer. However, such a risk or gharar is
very remote in the case of real property. Hence, it should be allowed.
Thus, according to the Ḥ anafīs, the prohibition of reselling before tak-
ing possession is based on the fear of destruction. It is also argued that
such a sale will lead to a chain of liability.8
The third stand is that of the Mālikīs and some Ḥ anbalīs. They
maintain that the above ruling should be restricted to foodstuff only.
They argue that only the aḥ ādīth that mention foodstuff are qualified
(muqāyyadah), while the other aḥ ādīth are general (muṭlaqah). More-
over, the above aḥ ādīth are specific about foodstuff while the other
aḥ ādīth are general. Therefore, as it is the rule in Islamic jurisprudence,
in such a case the specific must prevail.9
4
Musnad Imām Aḥmad, vol. 3, p. 302.
5
Saḥ īḥ al-Bukhārī, Dār al-Qalam, Damascus, 1981, vol. 3, p. 750; Saḥ īḥ Mulim with
al-Nawawi, vol. 10, p. 168.
6
See Saḥ īḥ al-Bukhārī with Fatḥ al-Bārī, Book of Sale, vol. 4, pp. 349–350.
7
Al-Nawawī, al-Majmū Sharḥ al-Muhadhdhab, vol. 9, pp. 264–271.
8
See al-Kasānī, Badāiʾ al-Sanāii, vol. 4, pp. 394–396.
9
Ibn Rushd, Bidāyat al-Mujtahid, vol. 2, p. 142; Ibn Juzai, al-Qawānīn al-Fiqhiyyah,
p. 341; al-Bājī, al-Muntaqā, vol. 4, p. 283.
sale prior to taking possession 161
A fourth opinion is reported from Ata Ibn Abī Rabāh and ʿUthmān
al-Batti, maintaining that it is legal to sell anything before taking pos-
session. However, this opinion has been rejected by other jurists on the
grounds that it totally ignores the previous aḥ ādīth and it is possible
that these scholars may not have come across these aḥ ādīth. The last
opinion is that of Ibn Ḥ azm, who maintains that the prohibition in those
aḥ ādīth should be limited to wheat. This is because the word taʿām that
occurs in the ḥ adīth means wheat and nothing else.10
The positions of Islamic financial institutions and some sharīʿah
boards are also divergent. Thus, it was decided in the al-Barakah sixth
conference, fatwā no. 14, that the prohibition of sale prior to taking pos-
session is confined to foodstuff.11 Similarly, the sharīʿah board of al-bank
Islāmī al-Sudānī preferred the Mālikīs’ opinion and allowed sale prior
to taking possession unless it is foodstuff.12 The sharīʿah board of the
Kuwait Finance House has taken a similar stand in one of its fatwā.13
However, the issue has been the focus of debate between the partici-
pants in the Islamic Fiqh Academy session on al-qabḍ wa ṣuwaruhu
al-mustajiddah (taking possession and its modern aspects). Some of the
participants, such as al-Qaraḍāghī, Nazīh Ḥ ammād, Mukhtār al-Salāmī,
Muahammad Nabīl Ghunaim, Omar Jah and others, consider the pro-
hibition to be confined to foodstuff, arguing that there is no gharar in
reselling before taking possession. People around the world are doing
so without any dispute resulting from such gharar, while in principle
gharar is that risk which will lead to a dispute. On the other hand, other
scholars like al-Ḍ arīr al-Zuhailī, ʿAli al-Sālūs and others maintain that
it includes everything and therefore, it should not be allowed.14
From the above it seems that the third opinion, namely that the prohi-
bition of reselling before taking possession is limited to foodstuff, is the
preferable stand due to the strength of its argument and its suitability to
prevailing market practices, especially if we refer to the ḥ adīth reported
by al-Bukhārī in which he commented by saying, What is prohibited
by the Prophet (PBUH) until the taking of possession takes place is
10
Ibn Ḥ azm, al-Muḥ allā, vol. 9, p. 292.
11
al-Fatāwā al-Iqtiṣādiyyah, p. 37.
12
al-Bank al-Islāmī al-Sudānī, Fatāwā Haʾiat al-Raqābah al-Sharʿiyyah, Qism
al-Amwāl, Idārat al-Tawjīh al-Shariʾ wa al-Buhūth, pp. 14–17.
13
ʿAbd al-Sattār ʿAli Qaṭtạ n, Bayʿ al-Bidāʿa Qabl Ḥ iyāzitihā, Bayt al-Tamwīl al-
Kuwaiti, n.d., pp. 17–19.
14
For more details about this discussion, see Majallat Majmaʿ al-Fiqh al-Islāmī,
(Discussion about al-Qabḍ wa Ṣuwarhī al-Mustajiddah), no. 6, vol. 2, pp. 739–767.
162 chapter six
foodstuff.”15 This expression shows that the prohibition is just limited to

foodstuff. Moreover, the claim is made that, by reselling before taking
possession, the seller is profiting from something for which he is not
bearing the liability of loss since the liability of the sold commodity
is still with the first owner. However, the proponents of the preferred
opinion maintain that the liability will be transferred to the buyer and
there is nothing illegal in having a chain of liability.
Furthermore, Ibn Qayyim in his defense of the legality of sale prior
to taking possession brought up a number of cases in which there is a
sale prior to taking possession and they are accepted as legal, even by
those who oppose the legality of the sale prior to taking possession.
This includes the legality of a person’s selling his share in inheritance
before taking possession or what he got through a will or bequest and
the right for a woman to sell her dowry.16 This shows that the position
that prohibits any sale before taking possession is not consistent.
Based on the above argument, it could be said that taking possession
of something before reselling it is not a condition in the commodities
futures market involving nonfoodstuff products, such as cotton, rubber,
tin, metal platinum, aluminum, and especially oil and its derivatives.
However, foodstuff commodities would be included based on the strict
and literal application of the above opinion.
However, one may ask is the prohibition of reselling foodstuff before
taking possession based on rationality (taʿlīl ) or is it a dogmatic mat-
ter (taʿabbudi)? If its basis is rational, such as the possibility of it being
destroyed or perishing, as is advanced by the Ḥ anafīs, Shāf ʿīs17 and
Ḥ anbalīs,18 it could be said that this possibility may not occur nowa-
days in some foodstuff commodities, which can be preserved for a long
time due to technological advancements. Moreover, the modern futures
market has never witnessed a dispute based on such an issue due to the
modern mechanisms in place.
Similarly, if we consider the Mālikīs’ opinion which allows the sale
of foodstuff before taking possession, in lump sum ( juzāf ) without
weight or measure, it could be argued that the ʿillah or the cause of
15
See Ṣahīh al-Bukhāri with Fatḥ al-Bārī, Book of Sale, vol. 4, pp. 349–350, ḥ adīth
no. 1525, and the following.
16
For a full report of these cases, see Ibn Qayyim, Sharḥ Sunan Abī Dāʾūd with ʿAwn
al-Maʿbūd, vol. 9, pp. 386–7.
17
al-Shirāzī, al-Muhadhdhab, vol. 4, p. 280.
18
Ibn Qudāmah, al-Muqhnī, vol. 4, p. 114.
the prohibition of reselling foodstuff before taking possession is not

because the commodity is foodstuff, as maintained by some scholars19
who argue that foodstuff has a special position in the sharīʿah and
because monopoly in foodstuff was strictly prohibited. Moreover, the
selling of foodstuff is also associated with currency in a specific ruling
regarding the exchange of ribawī (involving riba) items, which is not
the case with other items. Therefore, these scholars argue that it is not
feasible to ignore the command in the aḥ ādīth regarding sale before
taking possession involving foodstuff.
Some Mālikīs maintain that the ʿillah here is the possibility of ribā
and therefore, the sale of foodstuff should be prohibited on the basis of
blocking the means (sad al-dharāiʿ ). Thus, a person may sell wheat to
another person and then buy it from him with the intention of obtain-
ing the cash while the action of buying and selling is just a trick or
ḥ īlah.20 A similar interpretation is also reported from Zaid ibn Thabit
and Abū Hurairah. Al-Shawkānī considers it as the best kind of taʾlīl or
rationalization because these companions are the best persons to know
about the meaning and objective of the Prophet’s aḥ ādīth.21
It seems that the possibility of ribā might be obtained if the buyer
resells the commodity to the seller himself and this will be a kind of
bayʿ al-ʿīnah. However, if he is selling it to a third person there is no
possibility of ribā and, therefore, it should not be prohibited. More
importantly, the objective of traders in the futures market is not to get
loans through the exchange of commodities but rather to manage their
risks. Hence, there is no possibility of ribā in the sale prior to taking
possession as it is practiced in the commodity futures market.
Another argument advanced by the Mālikīs is that the sharīʿah has
a purpose in disallowing the sale of foodstuff before taking possession.
The purpose is to make foodstuffs always visible and apparent to people.
This will benefit many people, such as the carrier and the measurer
who may lose their jobs if commodities are traded before being taken
into possession. Moreover, its continuous presence might be a source
of psychological comfort to some people especially the poor in time
19
See al-Qarāfī, al-Furūq, vol. 3, pp. 281–282; al-Qaradāghī, “al-Qabḍ: Ṣuwaruhu wa
bi Khāssatin al-Mustajiddah minhā wa Ahkamuhā,” Majallat Majmaʿ al-Fiqh al-Islāmī,
1990, no. 6, vol. pp. 568–572.
20
See, Ibn Rushd, Bidāyat al-Mujtahid, vol. 2, p. 144; al-Bājī, al-Muntaqā, vol. 4,
p. 280.
21
al-Shawkānī, Nayl al-Awtār, vol. 5, p. 169.
164 chapter six
of hardship. Thus, by allowing it to be sold without taking possession,

traders will exchange it without making it available to the public and
the above objective will be undermined.22
Yet, even this argument seems to be of little effect in the socio-
economic structure of modern society. On the one hand, some contem-
porary scholars have maintained that buying before taking possession
will lead to an increase of the price of the commodity sold which, as a
result, will burden the consumer.23 However, this opinion is opposed by
other scholars such as Majd al-Dīn ʿAzzām who did not see any neces-
sary link between the sale before taking possession and the increase in
price of the commodity.24 Similarly, Kamālī maintained that ʿAzzām’s
analysis is correct and it is merely presumptuous to say that every seller
in the series will make a profit and even if so, the settlement price that
is paid upon delivery, assuming that delivery does occur, is normally
a predetermined price that has been agreed on between the buyer and
the seller in the first link. If delivery takes place upon maturity, it is
basically this price.25
The Meaning of Taʿām
A certain debate has arisen about the concept of taʿām (foodstuff) in the
above issue. Some maintain that taʿām is confined only to wheat as ibn
Manzūr reports from ʾahl al-Ḥ ijāz, while others have limited it to dates.
Ibn al-Athīr, on the other hand, maintains that it includes everything
that could be considered as a foodstuff of subsistence (yuqtātu bihi),26
while the Mālikīs, for instance, upheld that it is what falls under zakah.27
Based on the above, it could be said that many of the commodities traded
in the futures market nowadays, although they are foodstuff, are not
basic food of subsistence, such as sugar, coffee, and similar products and,
22
al-Dasughī, al-Sharḥ al-Kabīr, vol. 3, p. 131.
23
See Al-Ḍ arīr, “al-salam wa tatbiqātuhū al-Muʿāṣirah,” Majallat Majmaʿ al-Fiqh
al-Islāmī, 1996, no. 9, vol. 1 p. 402; Bayt al-Tamwīl al-Kuwaiti, al-Fatāwā al-Sharʿiyyah
fi al-Masāʾil al-Iqtiṣādiyyah, p. 534.
24
Bayt al-Tamwīl al-Kuwaitī, al-Fatāwā al-Sharʿiyyah fi al-Masāʾil al-Iqtiṣādiyyah,
p. 535.
25
Kamālī, “Islamic Commercial Law: An Analysis of Futures,” p. 207.
26
For elaboration on the issue, see Ibn Ḥ ajar, Fatḥ al-Bāri, vol. 3, pp. 373–5.
27
See al-Bājī, al-Muntaqā, vol. 4, p. 280; Mahmūd Shammām, Majallat Majmaʿ al-
fiqh al-Islāmī, no. 6, vol. 2, 1990, p. 920.
therefore, could be traded in an Islamic futures market without being

affected by the issue of selling taʿām before taking possession, and the
concept of taʿām will be confined to food of subsistence such as wheat,
barly, rice, and other similar products. However, some others maintain
that taʿām here is general to any edible thing including fruit.
Salam and the Futures Contracts
On the other hand, since the permissibility of a futures market could be

based on the conventional forward contract or on salam as is mentioned
above, the legality of selling the subject matter of salam before taking
possession of it needs to be briefly addressed. Even though the issue
is closely related to the general issue of reselling before taking posses-
sion discussed above, the juristic debate over the matter is somehow
different due to the interpretation of a specific ḥ adīth on the sale of the
subject matter of salam before receiving it and the nature of salam as
an independent type of sale. Thus, the majority28 maintains that it is
illegal to resell the substance in salam before taking possession, relying
on the ḥ adīth of the Prophet (PBUH), “Whoever makes salam shall not
exchange it before taking possession.”29 They argue that in this ḥ adīth it
is clear that the buyer should not exchange the material of salam with
the seller or with another person before taking possession. However,
this is a weak ḥ adīth according to Ibn Ḥ ajar.30 Therefore, it could not
be the basis for any ruling.
Ibn Taymiyyah and his disciple Ibn Qayyim maintained that there
is no legal problem in exchanging the subject of salam before taking
possession, but if it is sold to the seller himself it should be at the same
price or less, but not more. However, if it is sold to a third party it could
be at the same price or more or less. Moreover, Ibn ʿAbbās has the same
opinion as Imām Aḥmad in one of his opinions. More important, this
is also the Mālikī stand. They have also maintained the distinction they
have drawn between foodstuff and other products.31 The contemporary
28
Ibn ʿĀbidīn, Rad al-Muḥ tār, vol. 4; p. 209; al-Buḥūti, Kashshāf al-Qināʿ, vol. 3, p. 293;
al-Kāsānī, Badāi al-Sanāi, vol. 5, p. 214; Ibn Qudāmah, al-Mughnī, vol. 4, p. 334.
29
Abū Dāʾūd, Sunan Abū Dawūd, Matbat Muṣtaphā al-Halābī, 1952, vol. 2, p. 247;
Ibn Mājah Sunan Ibn Mājah, vol. 7, p. 66.
30
However, the ḥ adīth is reported to be weak. See Ibn Ḥ ajar, Talkhīs al-Ḥ abīr fi Takhrīj
Aḥ ādīth al-Rŭfiʿ al-Kabīr, Sharikat al-Tibāa al-Fanniyyah, Egypt, vol. 3, p. 225.
31
Ibn Rushd, Bidāyat al-Mujtahid, vol. 2, p. 231.
166 chapter six
position of Muslim scholars is also divergent. Thus, Nazīh Ḥ ammād

maintained that it is legal to sell salam before taking possession as is
maintained by Ibn Taymiyyah and Ibn Qayyim because there is no text
from the Qurʾān and sunnah, ijmāʿ or qiyās, to prohibit that but, on the
contrary, the texts as well as the qiyās convey its legality.32 This stand
has also been backed by al-Qaradāghī,33 al-Zuhailī,34 Jāsim ʿAli Sālim,35
Hāshim Kamāli,36 Sāmi Ḥ ammod,37 Majd al-Dīn ʿAzzām.38 On the other
hand, Siddīq al-Ḍ arīr, ʿAjīl Jāsim al-Nashmī39 and others maintained
that it is illegal to resell anything before taking possession.
A partial solution to the above problem lies in the parallel salam or
al-salam al-muwāzi. It is the conclusion of a salam contract by the first
buyer in a previous contract of salam as a seller to sell a similar com-
modity to a third person without any legal relation between the two
contracts. In other words, after buying goods of a certain description
from a seller and paying the full price, the seller is due to deliver in
that contract, and the buyer in a separate and formally unconnected
salam contract sells goods of exactly the same description and for the
same due date to a third party, receiving full advance payment from
that buyer.
Despite the fact that the idea of the parallel salam was discussed by
some early scholars, such as Ibn Qudāmah40 and some Shīʿah scholars,41
some contemporary scholars contended that the idea of parallel salam,
although it did not violate the principle of getting benefit without incur-
ring liability involving gharar, is just a trick or ḥ īlah to ribā. It cannot
be immune from the idea of ribā, especially if it has been taken as a
method of trade. Moreover, it could also be a means of burdening the
consumer.42 However, this opinion did not receive great support since the
32
Majallat Majmaʿ al-Fiqh al-Islāmī, no. 9, vol. 1, pp. 628–629.
33
Ibid., p. 649.
34
Ibid., p. 652.
35
Ibid., p. 654.
36
Ibid. Islamic Commercial Law: An Analysis of Futures, p. 656.
37
Bayt al-Tamwīl al-Kuwaiti, al-Fatāwā al-Sharʿiyyah fi al-Masāʾil al-Iqtiṣādiyyah,
p. 526.
38
Ibid., p. 532.
39
Ibid., p. 643.
40
Ibn Qudamah, al-Mughni, vol. 4, p. 350.
41
Hasan al-Jawāhiri, “al-Salam wa Tatbiqātuhu al-Muʿāṣiarah,” Majallat Majmaʿ al-
Fiqh al-Islāmī, 1996, no. 9, vol. 1, p. 514.
42
Ṣiddīq al-Ḍ arīr, “al-Shurūt al-Sharʿiyyah li Siḥhạ t Bayʿ al-Salam,” al-Iqtiṣād al-Islāmī,
no. 171, 1995, p. 15; Ṣiddīq al-Ḍ arīr, “al-Shurūt al-Sharʿiyyah li Siḥhạ t Bayʿ al-Salam”,
al-Iqtiṣād al-Islāmī, 1996, no. 9, vol. 1, p. 407.
majority upheld the legality of the parallel salam. Thus, the majority of
the participants in the Islamic Fiqh Academy’s discussion on salam such
as Nazīh Ḥ ammād,43 ʿAli al-Qaradāghī,44 Ḥ asan al-Jawāhirī,45 ʿAbd al
Sattār Abū Ghuddah,46 and Wahbah al-Zuhailī approved its legality.47
It should be noted that the need for parallel salam is not just to build
an Islamically acceptable futures exchange but also to facilitate business
transactions for Muslim investors trading outside the organized market.
Futures trading is not necessarily done through an organized futures
exchange. It could be done over the counter.
Suppose a wholesaler contacts a palm oil refining company for the
delivery of 1000 tons of palm oil to be delivered six months later for
RM 100 per ton. He will pay the price at the conclusion of the contract
as it is the condition according to the majority of Muslim scholars in
a salam contract or after three days or more according to the practice
followed by the Mālikīs and supported by some contemporary scholars.
Immediately he concludes several parallel salam contracts with a number
of palm oil retailers to deliver a similar quantity of palm oil at the same
time as the first contract for RM 110 per ton. Thus, there is no formal
relation between the first salam contract and the following parallel salam
contract but it allows this businessman to manage his business.
Parallel Salam and the Futures Market
To foresee the possibility of using parallel salam to build an Islamic

futures market, let us examine the following two proposals. The first
proposal is suggested by Fahīm Khān. Suppose in June, A offers for
sale 1000 bushels of rice to be delivered in December at RM 10 per
bushel. B accepts the offer and pays A RM 10,000 for the 1000 bushels
as stipulated by the conditions in the salam contract. However, some
time later B finds a good opportunity in another trade but he finds his
money blocked in the salam contract. He enters into a parallel salam
contract with X to sell 200 bushels of wheat to be delivered in Decem-
ber at the price of RM 10.50 per bushel and receives from X RM 2,100.
43
Majallat Majmaʿ al-Fiqh al-Islāmī, (discussion on salam), 1996, no. 9, vol. 1, p. 628.
44
Ibid., p. 649.
45
Ibid., p. 640.
46
Ibid., p. 645.
47
Ibid., p. 651.
168 chapter six
B finds another opportunity and offers to sell 800 bushels in December

at the price of RM 11.00 per bushel under salam contract. C, a trader,
agrees to purchase 600 bushels and pays RM 6600 to B while Y, a small
saver, agrees to purchase 100 bushels and pays RM 1100 to B. Thus,
in this situation there is a primary market where A and B are original
traders. This trade has generated a secondary market where B is the
seller and X, Y, Z are purchasers.
In December, if X and Y do not want to receive the deliveries, they
may offer to sell off a number of bushels equivalent to what they pur-
chased in their futures contract. They may offer the price of RM 11.20,
as the market price is RM11.50 in order to get rid of the stock. It is
possible that to deliver and sell in the cash market. C and D may accept
this offer and pay to X, Y, Z respectively these amounts. B will receive
the delivery from A and will make delivery to X, Y, Z and C. On the
other hand, X, Y and Z receive their deliveries and deliver them to C
and D. Meanwhile C and D sell the product in the spot market or keep
it for their own use.48
To further elaborate on his plan of a futures market based on salam,
Fahīm Khān proposed that a clearing house may facilitate the above
chain of transactions. Thus, for instance, A will make delivery to B using
the clearinghouse as an intermediary. After taking delivery, B sells and
makes delivery to X, Y and C through the clearinghouse. X and Y receive
the deliveries from the clearinghouse and make delivery to C and D. C
and D will either receive delivery from the clearinghouse or will sell it
in the spot market. Since C and D are selling in the spot market, they
can even sell their documents received from the clearinghouse and their
buyers could receive their delivery from the clearinghouse.49
Another proposal for a salam-based futures contract was put forward
by Vogel and Hayes. Although this proposal is similar to some extent
to the above proposal, it contains some positive additions. It comprises
different steps, which are summarized below.
The first step is that such a market would be managed through a
kind of special purpose fund, muḍārabah or a subsidiary of an Islamic
bank, by establishing a muḍārabah fund to act as broker for one or more
particularly fungible commodities. Suppose a fund is established to buy
and sell raw cotton, and enters into a salam contract with a large cotton
48
See, Fahīm Khān, Islamic Futures and their Market, pp. 58–59.
49
Ibid.
producer for a million bales of cotton for delivery in six months. The
fund has already entered into different parallel salam contracts in which
it sells cotton under salam contract. The fund’s profits will come from
the difference between the wholesale price and the retail price at which
it is bought and the retail price at which it is sold. These contracts are
totally independent from each other.
The second step toward a viable market is for the fund to make a
market in the retail salam contract, publishing “bid and asked” prices
for entering into contracts as either buyer or seller. If a cotton user
purchases a salam contract but thinks better of it, he can come to the
fund and sell a salam contract for the amount of cotton he is long on at
a price which the fund deems appropriate at that point in time, regard-
less of whether the fund has a counterparty lined up. In the opposite
situation, if a cotton producer had sold a salam contract for his cot-
ton crop several months earlier, locking himself into what he believed
would be a premium price but then the price goes up further and he is
convinced that the price will go up even further, he may approach the
fund to purchase cotton similar to his first contract.50
However, it should be noted that if the fund enters into contracts
as principal, rather than confining itself to merely brokering the par-
ticipants in the market, there is a possibility that the fund may have
in some instances a net position, which is not in balance. Therefore,
the fund needs a larger capital base than if its task is limited to just
executing simultaneous and equal parallel salam. The fund brokers deal
between customers and facilitate such deals by guaranteeing the per-
formance of both parties. Such credit enhancement enables the parties
to transact readily and anonymously, with a net benefit to the parties
on a risk adjustment basis. The fund can guarantee the parties’ obliga-
tion through the charging of administrative costs by doing so and by
recouping its costs from separate sources, such as license fees, service
fees, etc. Salam sellers can give a pledge or rahan for their performance,
similar to a margin in conventional futures contracts. A buyer in one
salam contract can use his investment in that contract as a pledge to
secure his position as a seller in another.51
50
Frank E. Vogel and Samual L. Hayes, Islamic Law and Finance: Religion, Risk, and
Return, pp. 251–252.
51
Ibid.
170 chapter six
It should be noted that although the salam-based futures contract may

serve some of the benefits of a conventional futures contract, there are
some major differences between the two concepts, such as the fact that
the price in salam must be paid at the conclusion of the writing of the
contract, as is asserted by the majority, while in the forward contract
the price is postponed until the time of the delivery of the commod-
ity. Second, in a salam-based futures market, the actual transfer of the
commodity traded must pass from one party to another through the
chain of parallel salams until it reaches the final buyer. But a fund could
arrange for this transfer to be done through a formal mechanism such
as warehouse receipt.
On the other hand, the whole issue of taking possession before
reselling might be largely simplified, with regard to futures trading
through an exchange, if we consider the concept of taking possession
in light of the prevailing custom in futures markets nowadays. It is
generally agreed that the concept of qabḍ or taking possession could
be ḥ aqīqī (real) or ḥ ukmī. In the ḥ aqīqī form, the physical commodity
is transferred from the seller to the buyer while in the ḥ ukmī there is
no physical delivery but through any means that could be considered
as a form of taking possession.
Thus, the taking possession of the document of a specific commodity
recognized by market participants as legal tender showing the transfer of
ownership from one person to another is generally accepted by Islamic
financial institutions as a kind of taking possession (ḥ ukmī), although
the physical commodity is not transferred.52 Similarly, the taking of
possession of companies’ shares is done through the transfer of paper
documents and not through physical transfer and it is accepted by
many scholars as a legal transfer of ownership and a ḥukmī taking of
possession, although some others have their reservations.53 Moreover,
the taking of possession of currency exchange between different banks
is done just through account records or al-qabḍ al-ḥ isābī, which is defi-
nitely not a real or physical kind of taking possession, but it is accepted
by contemporary Muslims as a form of taking possession.54
Therefore, it could be argued that although the underlying asset in
futures commodities markets is a physical commodity, the futures mar-
52
See ʿAbd al-Sattār ʿAli Qaṭtạ n, Bayʿ al-Bidāʿ Qabl Ḥ iyāzitihā, Bayt al-Tamwīl al-
Kuwaiti, n.d., pp. 18–19.
53
See Al-Zuahilī, Bayʿ al-Ashum, Dār al-Maktabī, Damascus, 1997, pp. 39–41.
54
See Majallat Majmaʿ al-Fiqh al-Islamī, no. 7, and vol. 2, pp. 747–748.
ket is a special kind of market where it is internationally recognized that

the taking of possession will not occur through the physical transfer of
commodities but rather through the transfer of documents confirming
the transfer of ownership and liability from the seller to the buyer after
the contract is registered by the clearing house. Therefore, by analogy
to the above cited cases, it seems that the registration of the contract
by the clearing house and the transfer of documents between the seller
and the buyer in the commodity market is in fact taking of possession
or qabḍ, although it is ḥ ukmī and not ḥ aqīqī.
Bayʿ Al-Dayn Bi Al-Dayn and the Futures Contract

Before proceeding with the juristic debate over the issue, it is neces-
sary to ascertain the legal basis of the concept of bayʿ al-kāliʾ bi la-kāliʾ.
First of all it should be noted that there is no verse or genuine ḥ adīth
prohibiting bayʿ al-kāliʾ bi la-kāliʾ or what is generalized later as bayʿ
al-dayn bi al-dayn. The only ḥ adīth reported on the issue is the ḥ adīth
of Musā ibn ʿUbaidah from Ibn ʿUmar which indicates that the Prophet
(PBUH) prohibited bayʿ al-kāliʾ bi la-kāliʾ. However, it is agreed by all
early as well as modern Muslim jurists that this ḥ adīth is weak55 and,
therefore, could not be the basis for any legal ruling.
However, an ijmāʿ 56 is claimed to have materialized on the meaning
of the above “ḥ adīth.” But there are differences of opinion on what kind
of ijmāʿ has materialized concerning the bayʿ al-dayn bi al-dayn. Thus,
Ibn Taymiyyah and his disciple Ibn Qayyim are of the opinion that the
ijmāʿ has materialized only in the case of ibtidāʿal-dayn or the sale where
both countervalues are deferred to a future date. Ibn Taymiyyah has
not backed his claim by any evidence except the argument that there
is no benefit in such an agreement.
55
See Ibn Ḥ ajar, al-Dirāyah fi Takhtīj aḥ ādīth al-Hidāyah, Dār al-Maʾrifah, Beirut,
vol. 2, p. 157; al-Sanʿāni, Subul al-Salām, Dār ʾIhyā al-Turāth al-ʿArabi, Beirut, 1976,
vol. 3, p. 41; al-Shawkāni, Nayl al-Awṭār, Dār al-Jīl, Beirut, 1973, vol. 5, p. 157; Ibn
Taymiyyah, Majmūʿ al-Fatāwā, vol. 29, p. 473. The only transmitter of this ḥ adīth is
Musā Ibn ʿUbaidah al-Zabadī about whom Imām Aḥmad said that “his transmission
is not permissible (la Taḥillu Riwayatuhu) and there is no ḥ adīth saḥiḥ on the issue.”
Al-Shaf ʿī is also reported to have said the experts on ḥ adīth consider this ḥ adīth as a
weak ḥ adīth (yuwahhinūnahu). See Ibn Qudāmah, al-Mughnī, vol. 4, p. 64; al-Shawkānī,
Nayl al-Awtār, pp. 254–255.
56
Ibn Qudāmah, al-Mughnī, vol. 4, p. 64; al-Shawkānī, Nayl al-Awtār, pp. 254–255.
172 chapter six
Furthermore, the weakness of this argument has been discussed at the

beginning of this study where even some of the contemporary scholars
who take an extreme position about the sale of debt for debt recognize
the need, in modern transactions, for ibtidāʿal-dayn bi al-dayn, due to
its importance in modern commerce. Therefore, it should be allowed
even under the basis of the principle of necessity.
Al-Subkī,57 on the other hand, chooses another case (as it will be
explained later) as the possible case where ijmāʿ may have materialized.
Ibn Qayyim said there is no general text (naṣṣ ʿām) or ijmāʿ on the sale
of debt but what is reported is the prohibition of bayʿ al-kāliʾ bi al-kāliʾ.58
Given the difference of opinion about the area of bayʿ al-dayn bi al-dayn
where ijmāʿ has materialized, it could be argued that this will reduce
the reliability of such an ijmāʿ.
It should be noted that the misinterpretation of the issue of sale of
bayʿ al-kāliʾ bi al-kāliʾ leads many scholars to include mistakenly many
other forms of permissible sale under this concept. Thus, the first mis-
conception is to consider bayʿ al-kāliʾ bi al-kāliʾ as synonymous with
bayʿ al-dayn bi al-dayn, while in reality bayʿ al-kāliʾ bi al-kāliʾ even in
its broader concept refers only to a sale where both countervalues are
delayed. Yet, the reported “ḥ adīth” on the issue is about bayʿ al-kāliʾ bi
al-kāliʾ only.
However, some jurists tried to strengthen the authority of the above
ḥ adīth by referring to other ḥ adīth, claiming that they convey the same
meaning. Thus, al-Zuhaili,59 for instance, refers also to the ḥ adīth that
ribawī items should not be exchanged unless it is done hand to hand.
Nevertheless, such an argument would be acceptable if the juristic
debate about the prohibition of bayʿ al-dayn bi al-dayn were limited
only to ribawī items, while in fact the jurists have extended this pro-
hibition to every transaction involving the sale of debt. Moreover, if
the message conveyed by the ḥ adīth requiring that exchange of ribawī
items should be hand-to-hand is to prohibit the sale of debt for debt,
then, it does not need to be emphasized by the weak ḥ adīth about bayʿ
al-kāliʾ bi la-kāliʾ.
57
Al-Subki, Takmilat al-Majmūʿ, vol. 10, p. 107.
58
See Ibn Qayyim, ʿIlām al-Muwaqqiīn ʿan Rab al-ʿĀlamīn, vol. 2, p. 9.
59
Wahbah al-Zuhaili, Bayʿ al-Dayn fi al-sharīʿah al-Islāmiyyah, Dār al-Maktabi,
Damascus, 1997, pp. 50–51.
Similarly, al-Zuhailī60 referred to the ḥ adīth in which the Prophet

(PBUH) forbade the sale of what is in the wombs of animals which is
generally considered as one of the bases of the concept of gharar and
not that of the sale of debt, unless we maintain that the ʿillah in the
prohibition of sale of debt for debt is gharar. However, if the ʿillah is
gharar, then there is no gharar in the futures market, given the fact that
the contract is guaranteed by the clearing house and any party affected
as a result of the default of another person will get compensated through
the clearinghouse.
Thus, Ibn Qayyim rightly pointed out that “regarding the sale of debt
for debt there is neither implicit nor explicit text from the sharīʿah about
its prohibition.On the contrary, the principles of the sharīʿah convey
its permission”.61 Before that Ibn Taymiyyah said: “there is no general
text or ijmāʿ regarding the prohibition of the sale of debt for debt. The
prohibition reported is only about “bayʿ al-kāliʾ bi al-kāliʾ.”62
An illustration of the above unfounded generalization is the claim
by the Shāf ʿīs63 and the majority of Ḥ anbalīs that if A is indebted to
B for say 50 dinārs, while B is indebted to A for 5000 dirhams, and
they agreed to exchange what is in their dhimmah, then the deal will
be illegal. The main argument for this prohibition is that it is the sale
of debt for debt. It is clear that although this is an exchange of debt
for debt, nevertheless it is definitely not the exchange of one delayed
countervalue with another. In contrast, the above transaction fulfills a
good objective by discharging the liability or dhimmah of both parties.64
It should be noted that the above transaction is considered legal by the
Ḥ anafīs65 and some Ḥ anbalīs66 while the Mālikīs67 make it a condition
that the payment due for both debts is similar.
60
Ibid.
61
Ibn Qayyim, ‘Ilām al-Muwaqqiīn ʿan Rab al-ʿĀlamīn, vol. 2, p. 9.
62
Ibn Taymiyyah, Majmū al-Fatāwā, vol. 29, p. 512.
63
64
See Ibn Taymiyyah, Majmūʿ al-Fatāwā, vol. 29, p. 472; Nazīh Ḥ ammād, Bayʿ al-Kŭliʾ
bi al-Kŭliʾ (bayʿ al-Dayn bi al-Dayn) fi al-Fiqh al-Islāmi, Markaz Abḥāth al-Iqtiṣād
al-Islāmī, Jŭmiʿat al-Malik ʿAbd al-ʿAzīz, Saudi Arabia, 1986, p. 25; Wahbah al-Zuhaili,
Bayʿ al-Dayn fi al- sharīʿah al-Islāmiyyah, pp. 50–51; Muhammad Atīqī, “Bay al-Dayn
Ṣuwaruhu wa ʾAhkāmuhu Dirāsah Muqāranah,” Majallat al-sharīʿah wa al-Dirāsāt
al-Islāmiyyah, no. 35, August 1998, pp. 313–315; Isāwi Aḥmad Isāwi, “Bayʿ al-Dayn wa
Naqlihi,” Majallat al-Azhar, 1956, no. 2, pp. 165–6.
65
Ibn ʿĀbidīn, Rad al-Muhtār, vol. 4, p. 239.
66
Ibn Taymiyyah, Majmūʿ al-Fatāwā, vol. 29, p. 472.
67
See Jawāhir al-Iklīl, vol. 2, pp. 10–11.
174 chapter six
It is also claimed by the majority of Muslim scholars from the

Ḥ anafīs,68 Mālikīs,69 Shāfīs,70 and Ḥ ambalīs71 that a debt could not be
transformed into a price for a salam contract because such a transac-
tion will be reduced to a bayʿ al-dayn bi al-dayn. Ibn al-Mundhir72 has
explained the ijmāʿ about its prohibition. To give an example, suppose
A is indebted to B for 100 dinārs and B wants to transform this 100
dinārs into a price of a salam contract in exchange for which A shall
bring to him ten bushels of wheat, for instance, by the end of the year.
However, the claim by the majority that this kind of transaction is
illegal has been rebutted by Ibn Taymiyyah, who stressed that there is
no ijmāʿ on the above case as it is reported and it is not a kind of bayʿ
al-kāliʾ bi al-kāliʾ, nor even does it have its meaning. Therefore, there
is nothing illegal in such a transaction.73
Similarly, it has been claimed that, in principle, ḥ awālah (money
transfer) shall be declared illegal because it is a kind of sale of debt for
debt, but it has been allowed by way of exception due to the need for
such a transaction.74 The weakness of this argument is clear. In ḥ awālah
there is no deferment and therefore there is no case of bay al-kāliʾ bi
al-kāliʾ. Moreover, the permissibility of ḥ awālah is proven by a genuine
ḥ adīth where the Prophet (PBUH) was reported to have said: Delay of
payment of debt by a wealthy person is an act of injustice (zulm). But if
your debt has been transferred from a poor debtor to a wealthy debtor
you should accept it.”
Having discussed the methodology adopted regarding the issue and
where many cases have been included mistakenly, we have to refer to
the cases with possible connotations of bayʿ al-kāliʾ bi al-kāliʾ. Address-
ing the issue of bayʿ al-kāliʾ bi al-kāliʾ or bayʿ al-dayn bi al-dayn, Nazīh
Ḥ ammād stressed that the different forms of bayʿal-dayn bi al-dayn are
limited to the following five forms:
The first case is what is known in the Mālikī school as ibtidāʾ al-
dayn bi al-dayn or al-nasīʾah bi al-nasīʾah, namely, the exchange of
68
See al-Kāsāni, Badāi al-Sanāi, vol. 5, p. 205; Rad al-Muḥ tār ʿalā al-Dur al-Mukhtār,
vol. 4, p. 209.
69
70
al-Ramlī, Nihāyat al-Muhtāj, vol. 4, p. 1.
71
Ibn Quadāmah, al-Mughni, vol. 4, p. 329; al-Buhūtī, Sharḥ Muntahā al-Irādāt,
vol. 2, p. 221.
72
Ibn al-Mundhir, al-Ijmāʿ, Muʾassasat al-Kutub al-Thaqāfiyyah, Beirut, 1993, p. 76.
73
See Ibn Qayyim, ʿIlām al-Muwaqqʿīn, vol. 2, p. 9; Nazīh Ḥ ammād, bayʿ al-kāliʾ
bi al-kāliʾ, p. 26.
74
Nihāyat al-Muḥ tāj, vol. 4, p. 88; al Suyūtī, al-Ashbāh wa al-Nazāʾir, p. 88; Tashīl
Minaḥ al-Jalīl, vol. 3, p. 235.
two things, both delayed, or the exchange of one delayed countervalue

for another. It is the most important form of bayʿ al-kāliʾ bi al-kāliʾ.
Ibn Taymiyyah and Ibn Qayyim confined the prohibited form of bayʿ
al-dayn bi al-dayn to this case. However, their agreement is contested.
We have already dealt with this form of bayʿ al-dayn bi al-dayn while
discussing the legality of the conventional forward contract, which
is basically a contract where both countervalues are postponed to a
future date. Therefore, the study addresses in this part the other forms
of sale of debt due to their closeness to the futures contract and not
the forward contract.
Thus, the first kind of bayʿ al-dayn bi al-dayn in this part is the sale
of an established debt (mustaqir) in the dhimmah of the debtor, say one
hundred dirham for instance, by a new deferred debt of a different kind
than the first one. Suppose a person needs from another one hundred
dīnār. He agrees with the debtor that he would like to take in exchange
for this one hundred dīnār one hundred bushels of wheat to be deliv-
ered next year. Another example would be when a person (buyer) gives
another (seller) one hundred dirhams for a specific amount of wheat,
which should be delivered next year. At the due date, the seller said to
the buyer, “I have no wheat to deliver for the time being, could I buy
it from you for two hundreds dirhams which will be delivered next
month?” Thus, the transaction becomes the exchange of one delayed
countervalue for another delayed countervalue. It should be noted that
al-Subkī considers it as the only form on which ijmāʿ has materialized. It
is called by the Mālikīs faskh al-dayn fi al-dayn (extending the payment
of debt in exchange of interest).75 The reason behind the prohibition of
such a transaction is that it is a means that may lead to ribā al-nasīʾah.
However, Ibn Taymiyyah did not see any problem in such a transaction,
since by such a deal the liability of the debtor would be discharged from
the first debt, a move commended by the sharīʿah, although the debtor
will be liable for the second debt.
The second form is the sale of an established dayn in the dhimmah
of the debtor to a future date with an addition. It is seen when a person
buys from another something with the price postponed to a future date.
At the due date, he fails to get the necessary money to settle his debt.
Hence, he suggests that the seller should buy it from him at a higher
price on a future date. Suppose a person buys a car from another at
RM 10,000 with the price to be paid three months later. At the due
75
176 chapter six
date he fails to secure the RM 10,000 and suggests that the seller buys
the car from him for 12,000 to be paid four months later. The reason
behind the prohibition of such a sale is that the transaction involves
ribā al-nasīʾah.76 However, if he had suggested to him to buy the car
at the same price as the original price, namely RM 10,000 or less, the
transaction will be valid.77
It is clear that such a transaction will lead to ribā al nasīʾah and,
therefore, it may be argued that the prohibition of such a transaction
is not because it involves the sale of debt for debt, but for its involve-
ment of ribā.
The third case is the sale of a debt to a third person at a price to be
delivered on a future date. Suppose one person needs from another one
hundred bushels of wheat from a previous contract to be delivered next
month. Before taking delivery, he resells that one hundred bushels of
wheat to a third person for RM 1000 to be delivered three months later.
The reason behind the prohibition of such a sale is the possible inability
of the seller to deliver the subject matter of the contract. This case is
similar to the case of sale before taking possession discussed above.
However, if we apply this explanation to the futures market it will not
be an issue at all. The clearinghouse will guarantee all contracts.
The fourth case involves selling a debt to a third person at a price to
be paid immediately. Suppose a person is indebted to another for a car
to be delivered two months from now then; he sells it to a third party
for a price to be paid immediately. This is declared by the majority
to be an invalid transaction while the Mālikis allow it on eight condi-
tions which could be summarized into two main categories: it should be
(a) free from ribā and (b) free from gharar.
It is clear from the above elaboration that although some scholars
have cited ribā as one of the causes for the prohibition of the sale
of debt for debt, it seems that gharar is the major cause. However, a
limited kind of gharar is acceptable in the sharīʿah, while an excessive
amount will render a contract illegal. This concept of gharar has close
connection with speculation, which could also be excessive and lead to
market collapse or could be a limited, which is not only desirable but
also necessary sometimes. The following chapter will elaborate on the
regulation of the futures industry in order to avoid market collapse.
76
See Minaḥ al-Jalīl, vol. 2, p. 562; al-Zurqānī, Sharḥ Khalīl, vol. 5, p. 81.
77
Ibid.
CHAPTER SEVEN
FUTURES MARKET REGULATION
Intermediaries in the Futures and Options Market
Intermediaries in the futures and options market are people who trade
or provide advice on trading to investors. Under the futures industry
Act 1993, six types of intermediary are recognized: Futures Brokers,
Futures Broker Representatives, Futures Fund Managers, Futures Fund
Manager’s Representatives, Futures Trading Advisers and Futures Trad-
ing Adviser’s representatives. However, among all the intermediaries
mentioned here the broker plays the most important role.
In highly competitive environment commodity broking is an impor-
tant part of modern trading. “A future broker, like a stockbroker, is
essentially an agent or intermediary who buys and sells on behalf of
clients in return for a commission; he can also act as principal in cer-
tain transaction.”1
Under the futures industry Act 1993, Futures Brokers must be in the
form of a corporation. Thus, Futures brokers in the Malaysian context,
for instance, refer to companies which are member of the exchange
in which they trade and agree to abide by its business rules. The basic
functions of futures brokers are: to represent their clients in placing
orders in the market to collect margins from the clients to provide basic
accounting records and transaction to their clients and to advise and to
recommend to their clients for their trading programs. Futures brokers
must execute all orders for trading in futures and options contracts on
the exchange. This means that, besides being licensed under the Futures
Industry Act, a futures broker must be a member of an exchange com-
pany the rules of which he shall abide by.2
1
David Courtney and Eric C. Bettelheim, An Investor Guide to the Commodity
Futures Markets, London, Butterworths, 1986, p. 58.
2
See, Malaysian Futures and Options Examination Guide, Module 1: Regulation, 1997,
pp. 1–22; Low Chee Keong, Securities Regulation In Malaysia Malayan Law Journal Sdh
Bhd, Kuala Lumpur 1997, pp. 178–179.
178 chapter seven
Thus a futures fund manager is a person who raises money from

investors in order to use it, whether in part or in total, in the trading of
futures contracts. In other words, futures managers are companies’ funds
that specialize in trading in futures contracts. The funds operate very
much like unit trusts and enable small investors to pool their resources
for management by futures fund managers. Employees of futures fund
management are referred to as futures fund manager representatives.3
The third category of intermediary is the futures trading adviser.
This could be a company or an individual. It provides advices and
analysis to clients who are interested in investing in the futures market.
Thus, although a futures trading adviser may not conduct business as
a broker he serves principally as an advisor to investors. The advisory
role includes the business of advising other persons about trading in
futures contracts or engaging in the publication of futures reports.
Recommendations made by the adviser must be based on reasonable
grounds considering to the needs and financial situation of the inves-
tor, and to the subject matter of the recommendation. The investor has
the right to claim damages from the advisor when it can be established
that the loss was caused by the unreasonable recommendation of the
adviser. Obviously, the futures trading adviser is not obliged to follow
the instruction of the futures broker. This is because a futures trading
adviser does not deal with client money and property in connection
with futures contracts.4
It should be noted that all the intermediaries in the futures and
options market must comply with the relevant trading practices as
set out in Part V of the Futures Industry Act which includes sections
49 to 56. The sections deal with the issue of timely information to be
provided to the client by the broker who should make out a contract
note to the client not later than the next trading day beginning from the
day of execution irrespective of the fact whether he entered the futures
contract as principal or agent.
Moreover, when the broker is trades as principal in a futures contract
he should inform the person with whom he is trading that he is acting
in the transaction as principal and not as agent. More importantly, the
broker is required to separate the money, property and documents of
his customer from his own. Clients’ fund cannot be withdrawn from
3
Ibid.
4
Ibid.
futures market regulation 179
the segregated account except for the purposes of the payment of

deposits and margins, the payment of debts due to the broker from the
clients, and for monies drawn on clients’ authority. Brokers are also not
permitted to use monies belonging to one client financing the trade of
another client or of the broker himself. This is to ensure that there is
no misuse of the client’s funds.
Furthermore, the futures broker should not open a futures contract
account for a customer unless he furnishes the customer with a sepa-
rate written risk disclosure document. More importantly, the futures
broker should give priority to the customer order unless the customer’s
instructions require that. Thus he should not enter into a transaction of
purchase or sale of futures contracts, either as principal or on behalf of
an associated person, in case a customer of the futures broker who is
not associated with him, has instructed the futures broker, to purchase
or sell, futures contracts of the same class and he has not complied with
the instruction. The purpose of not allowing the broker to trade ahead
of their clients’ orders is to ensure that the clients are given the prefer-
ence over the broker in obtaining the best price in the market.
Finally, it is worth noting that contravention of any of the above
provisions renders the person liable, upon conviction, to a maximum
fine of one million ringgit and a term of imprisonment not exceeding
ten years. Besides the provisions of the Futures Industry Act regarding
the broker’s functions, COMMEX business rules address the issue as
well. Thus, rule 302 stipulates that a broker must maintain a minimum
Adjusted Net Capital of RM 500.000 or 10% of the margin required
to be paid to the clearinghouse or to any other party or clearinghouse
organization. If a broker’s Adjusted Net Capital falls below the speci-
fied level, the broker must immediately report this to the Compliance
Committee as well as lodge the necessary financial statements, returns,
record, etc.
Rule 303 deals with the activities prohibited for a broker. They include
trading in futures contracts on a futures exchange or a specified exchange
without the prior consent of the Exchange. Moreover a broker is prohib-
ited from trading on behalf of his clients without their instructions. In
addition, he is prohibited from trading in contravention of the business
rules of that exchange. Furthermore, he should not execute the instruc-
tions of a person to trade in futures contracts unless the instructions
executed affect a trade in COMMEX or a futures exchange. Similarly,
the broker is forbidden to cheat or attempt to cheat or commit fraud.
On the other hand, a broker is required to have an “operation manual”
180 chapter seven
that sets out the procedures to supervise the types of business which
he engages in, and supervise the activities of officers, employees, agents
and representatives.
In addition, the Business Rules specify that a broker must maintain
internal records of orders received and orders executed for clients which
include client names, account numbers, descriptions of the contracts
entered into, including the underlying instrument, delivery settlement-
month and year, types of order, number of lots and price. In addition,
the type of instructions to trade in contract should be specified whether
it is an order to buy or to sell, including the date and time of receipt,
transmission and execution and the person who received and executed
those instructions. Members must also maintain all records for a period
of 5 years.5
Looking at the role of brokers in the futures market from an Islamic
perspective it could be said that these functions fall under the concept
of samsarah or wakālah bi ʿajr in Islamic law. Thus, almost all modern
principles of brokerage could safely be accommodated in Islamic law
except the issue of brokers borrowing with interest which definitely
must be avoided in any possible Islamic futures market.
Meanwhile, the other regulations governing the industry such as the
financial capability of a broker, his duty not to trade against his client, to
give priority to his customer’s order or to segregate his customer’s fund
are administrative requirements for smooth running of the market and
for the protection of investors and could be easily adopted in Islamic
law under the basis of maṣlaḥ ah.
The Fidelity Fund
Sections 58 to 78 of the Futures Industry Act require COMMEX to

establish and maintain a fidelity fund consisting of, inter alia, all money
paid to the exchange by futures brokers, by exchange companies or by
an insurer pursuant to a contact of insurance or indemnity. In addition,
it consists also of profit acquired from time to time from the investment
of the fidelity fund and all other moneys lawfully paid into the fidelity
fund including donations and legacies.
5
See, Malaysian Futures and Options Examination Study Guide Module 5: COMMEX.
The purpose of the fidelity fund is to compensate persons who have

suffered monetary loss because of a default committed in the course
of or in connection with trading in futures contracts in a futures mar-
ket of an exchange company by a futures broker or by any director or
employee, as the case may be.
However, the exchange company is not obliged to consider and
determine a claim against the fidelity fund unless the person making the
claim has satisfied the exchange company that he had made all efforts
(other than a legal action in court) to recover the loss from the futures
broker in relation to whom the claim arose or from any other person
who is liable for the loss.
On the other hand, it should be noted that the amount of compensa-
tion which any person is entitled to as a claim from the fidelity fund
is the amount of the actual pecuniary loss suffered by him including
the reasonable cost of and disbursements incidental to making and
proving his claim less any amount of value of money or other benefits
received or receivable by him in reduction of the loss from any source
other than the fidelity fund.
Looking at the functions of the fidelity fund from an Islamic point of
view, it is clear that these functions are administrative matters necessary
for the smooth running of the market and it could be easily accom-
modated under the concept of maṣlaḥ ah. Moreover, the contributors to
the fidelity fund intend to benefit from their involvement in the futures
market, to protect its continuity and at the same time to share any
loss that might happen through their contribution to the fidelity fund.
Indeed this is a positive kind of cooperation which does not contradict
any principle of Islam.
Futures Market Regulation
Every futures market exchange has its own rules and regulations although
generally there are some points of similarities. In the present study we
will focus on the regulation of the Malaysian futures market. Until
recently, the regulatory framework of the Malaysian futures and options
market was divided into two segments. One dealing with commodity
futures and the other with financial futures and options. Thus, trading
in commodity futures used to be regulated by the Commodities Trading
Commission, or CTC, a self-regulatory organization established under
the Commodities Trading Act. However, following the amendment of
182 chapter seven
the futures industry Act in April 1997, The Commodities Trading Act
1985 was repealed as well as any subsidiary legislation made or deemed
to have been made under the repealed Act was revoked.6 As a result,
futures and options are regulated by the Securities Commission pursuant
to the Futures industry Act 1993, the futures industry (Amendment)
Act 1995, the Futures Industry (Amendment and Consolidation) Act
1997, the Futures Industry (Amendment) Act 1998.
The Securities Commission was established in March 1993 under
the Securities Industry Act 1993 (SCA). It is a statutory body whose
primary responsibility is the regulation of the Malaysian securities and
futures markets.7
The Securities Commission’s functions which are relevant to the
futures industry include the following:
1. Advising the Minister on all matters relating to the futures industry.

2. Regulating all matters relating to futures contracts.
3. Supervising and monitoring the activities of the exchange and clear-
ing house.
4. Taking all reasonable measures in order to maintain the confidence
of investors in the futures market by ensuring adequate protection
for such investors.
5. Promoting and encouraging proper conduct amongst members of
the exchange and all holders of licenses under the Futures Industry
Act.
6. Encouraging and promoting self regulation by professional associa-
tions or market bodies in the futures industry.
7. Issuing licenses, supervising all licensed persons and maintaining
and promoting the integrity of all licensed persons in the futures
industry.
It is worth noting that besides the regulatory activities of the Securities

Commission, the futures exchange and the clearinghouse have their
own internal business rules. In other words, the Securities Commission
concerns itself with general policy formulation, licensing, product and
6
Art 14, sect 1–2 Futures Industry (Amendment and Consolidation) Act 1997.
Also, See Low Chee Keong, Securities Regulation in Malaysia Malaysian Law Journal,
Kuala Lumpur, 1997, p. 5.
7
See, Securities Commission, Malaysian Futures and Options: Regulation Module 1,
p. 26.
market approval, and prosecution while leaving the day to day super-
vision of the market, approval of entry into the industry prudential
control and membership regulatory responsibility to the exchange and
the clearing house.8
The supervisory role of the Securities Commission as well as that
of the exchange and the clearing house to preserve and promote the
integrity of the market and to protect the investors from improper
conduct could easily be accommodated under the principles of the
institution of ḥ isbah in Islam, which has the supervision of the market
as the most important part of its various functions. Ḥ isbah is generally
defined as the institution which promote what is good and forbid what
is improper (wilāyatun taqūmu ʿalā al-ʾamr bi al-maʿ rūf wa al-nahyi
ʿan al-Munkar).9
The institution of ḥ isbah was a shining example and direct reflection
of the development of Islamic civilisation throughout the centuries
when Islamic principles were observed and implemented by Muslims.
It developed from a small institution concerned with the supervision of
the market to an institution comprising various departments and dealing
with almost everything that affects the life of the Muslim community
ranging from economics, workers’ rights, medicine, security, city plan-
ning, animal care, the environment and the welfare of students. In all
these areas the muḥ tasib was performing his duty with justice, patience,
and care without jeopardizing the personal privacy of the individual.10
The Prophet frequently undertook inspections of the market to check
on the application of the economic principles of the sharīʿah from
engaging in improper behaviors, and thus he may be described as the
first muḥ tasib in Muslim history. During of his inspection, as reported
in a widely known tradition: “the Messenger of God (peace be upon
him) approached a stack of food (i.e., wheat) and inserted his hand,
his fingers reached something moist. What is this, food merchant? The
Prophet asked. The merchant answered: It has been affected by rain,
Messenger of God. Then the Messenger of God asked: why not put the
8
Ibid., pp. 26–27.
9
Al-Māwardī, al-Aḥ kām al-Sultāniyyah wa al-Wilāyāt al-Diniyyah, Dār al-Fikr, 1983,
p. 207; Ibn Taymiyyah al-Ḥ isbah fi-al Islām, al-Madīanh al-Munawwarah, al-Jāmiah
al-Islāmiyyah, n.d., p. 91.
10
Al-Māwardī, al-Aḥ kām al-Sultāniyyah wa al-Wilāyāt al-Diniyyah, Dār al-Fikr,
1983, p. 207; Ibn Khaldūn al-Muqaddimah, (ʿAli Abd al-Wāḥid edition), Dār al-Fikr,
Cairo, 1960, p. 576; Ṣubḥī ʿAbd al-Munʿim, al-Ḥ isbah fi al-Islām bayn al-Nazariyyah
wa al-Ṭatbīq, Dār Riyāḍ al-Ṣāliḥīn, Cairo 1994, pp. 14–24.
184 chapter seven
moist part on the top of the stack so that people can see it? And he
added: “He who cheat us is not from us”.11 Permanent staffs were also
appointed as muḥ tasib during the time of Prophet. These include Sa‘īd
ibn al-ʿĀṣ, ʿAbd Allāh ibn Saʿīd ibn al-ʿĀṣ, ʿUmar ibn al-Kaṭṭāb, Samrah
al-Asadiyyah and al-Shifāʾ bintu ʿAbd Allāh.12
The present study is concerned about the role of the muḥ tasib in
market’s supervision. The sharīʿah sets out economic standards and
rules that Muslim should follow. Thus, the muḥ tasib regulated the
market activities in a number of ways. Cited bellow are some of the
important ways:
• First, the muḥ tasib would see that resources did not flow to the pro-
duction and distribution of goods and services which are categorically
ḥ arām in the Sharīʾah.
• Second, he would keep a strict watch on the supply position of essen-
tial articles especially foodstuff. At times of shortage he could compel
the hoarders to bring out their stock to the market (iḥ tikār).
• Third, all trade had to be done in the open market. Secret dealings
by the traders at their homes, warehouses and behind closed doors
could disturb the supply flows and thus interfere in the establishment
of a natural price level.
• Fourth, the trades were not allowed to collude to bid up prices arti-
ficially (najash). This clearly indicates a necessity for anti-monopoly
measures by the present day state.
• Fifth, the traders were not allowed to form groups to push newcom-
ers out of the market. Free access to market was ensured to anyone
who wanted to enter the market.
• Sixth, the urban traders were not allowed to meet the rural suppli-
ers on their way and to buy their products at cheaper rates, keep-
ing them in darkness about the market condition because such an
exercise provides undue profit margins to the economically power-
ful sections at the cost of the unaware villagers (talaqqī al-rukbān).
Moreover, this could lead to cut-throat competition between urban
merchants to reach the rural suppliers on their way and thus lead to
an unhealthy competition. It suggests that the muḥ tasib would have
11
Muslim, Ṣaḥ iḥ Muslim, Kitāb al-Īmān, ḥadīth no. 164.
12
See, Ibn Ukhuwwah, Muḥammad Ibn Muḥammad, Maʿālim al-Qurbah fi ʾaḥkām
al-Ḥ isbah, Maktabat Wahbah, Cairo, 1976, p. 38; Ibn Ḥ ajar, al-Iṣābah fi Marifat
al-Ṣaḥ ābah, Cairo, vol. 2, p. 47.
to play a decisive role in disseminating market information among

the rural suppliers to keep them abreast of the market trends. This
would automatically discourage the tendency to buy cheaply from
the ignorant farmers.
• Seventh, sometimes, rural suppliers were provided accommodation,
hotels and rest shelters near the market place so that they could hold
on for a few days and assess the market for themselves before entering
into a bargain. The idea was to strengthen the bargaining position of
the rural suppliers who could be exploited in urban centers if they
did not have a place to stay for a few days.
• Eighth, the middlemen, who did not add any utility to the products
but only reaped margins from buyers and sellers, were disbanded
(bayʿ ḥ āḍirin li bādin). This was to eliminate a class of exploiters and
to streamline the supply flows.
• Ninth, the interest of merchants as a class was also protected against
dumping in the market by a minority of merchants. If a minority of
traders could manage to sell a product at an abnormally lower price
than the prevalent market-rate, they were prohibited to do so, as such
a trend could damage the interest of the majority. It implies that if an
individual or a small group of businessmen introduces cheaper modes
of production, it may lead to mass-scale technological obsolescence,
unemployment and plant redundancies.
• Tenth, the traders and craftsmen were not allowed to hide the defects
of a product. Nor were they allowed to make false oaths to sell their
products. It suggests that the muḥ tasib may have to regulate the role
of advertisements in the present day context. The labels of products
and advertisements through commercial media may be scrutinised
prior to display to ensure the accuracy of their appeals.
• Eleven the muḥ tasib also checks any transactions involving ribā such
as (bayʿ al-ṣarf ). Thus, he may lay down forms of agreement permis-
sible in the Sharīʾah and those that may involve ribā.
• Twelve, of the conventional duties of the muḥ tasib was to compel
debtors to repay their debts on due dates if they had means to do
so. In case the debtor was unable to meet the claim till a later date,
he would intervene to get extension from the creditor. And in case
the debtor was too indigent to honor the debt, the muḥ tasib would
arrange help from the Zakat fund.13
13
See, Al-Māwardī, al-Aḥ kām al-Sultāniyyah wa al-Wilāyāt al-Diniyyah, pp. 207–210;
Ibn Taymiyyah al-Ḥ isbah fi-al-Islām, pp. 91–99; Ibn Ukhuwwah, Muḥammad Ibn
186 chapter seven
Trading Offences Under the Futures Industry Act

and Islamic Law
To deter undesirable and fraudulent practices in the market the Futures

Industry Act deals with the trading offences under ss. 79 to 88. These
provisions cover false trading, bucketing, dissemination of information
about false trading, manipulation and cornering, devices to defraud, false
and misleading statements, abuse of information obtained in official
capacity, falsification of records and the penalties for these offences.
They aim at discouraging and preventing unfair use of advantageous
positions and price distortions.
The integrity and efficiency of the futures market should rely solely
on the natural forces of supply and demand. Thus, no person is allowed
to create or cause to be created or do anything that is intended to create
a false or misleading appearance of active trading in futures contracts
on a futures market, or false or misleading appearance with respect to
the market, or the price of trading in futures contracts on the futures
market”.
S. 81 states that “No person shall circulate, disseminate or authorize
or be concerned in the circulation or dissemination of any statement or
information to the effect that the price of trading in a class of futures
contracts will, or tend to, rise or fall because of the market operations
of one or more persons, who know that the operations are conducted
in contravention of section 79.”
S. 84 similarly reads “No person shall, directly or indirectly, for the
purpose of inducing the purchase or sale of a futures contract, make—
(a) Any statement which, in the light of the circumstances in which it is

made, is false, misleading or deceptive with respect to any material
fact;
(b) or any statement which, by reason of the omission of a material
fact, is rendered false or misleading.
Muḥammad, Maʿālim al-Qurbah fi Aḥkām al-Ḥ isbah pp. 45–67 Muhammad Akram
Khān, “al-Ḥ isbah and the Islamic Economy” in Pubic Duties in Islam, the translation
of the Ḥ isbah by ibn Taymiyyah, translated from the Arabic by Mukhtar Holland,
the Islamic Foundation 1982, pp. 135–151; Cengiz Kallek, “Socio-Politico Economic
Sovereignty and the Market of Medina”, Journal of Islamic Economics, vol. 4, Issue 1&2
July 1995, pp. 1–14.
S. 86 addresses the issue of abuse of information obtained in official

capacity in his own or any other person advantage directly or indirectly.
It holds that: “Any person who in relation to trading in futures contracts,
has any information, which if generally known, might reasonably be
expected to affect materially the price of the subject matter of such
trading and which—
(a) he holds by virtue of his official capacity or former official capacity;

(b) it would be reasonable to expect a person in his official capacity
or former official capacity not to disclose except for the proper
performance of the function attached to that official capacity; and
(c) he knows is unpublished price-sensitive information in relation to
an underlying instrument which is the subject of futures contract,
shall not make improper use of such information to gain directly
or indirectly, an advantage for himself or for any other person.
It is not surprising that among the restraints imposed on futures mar-

ket participants is the prohibition is against price manipulation. This
prohibits all activities that cause or maintain an artificial price for a
commodity future. An artificial price is one which is different from
the one that would result under free market operation of supply and
demand.14 In this regard the Futures Industry Act states in section 82
that: “No person shall, directly or indirectly, (a) manipulate or attempt
to manipulate the price of futures contracts that may be dealt in on a
futures market, or of any underlying instrument which is the subject of
such futures contract; or (b) Corner or attempt to corner any underlying
instrument which is the subject of a futures contract”.
The prohibition of defraud is another issue crucial for the success of
any futures market. Section 83 of the Futures Industry Act states that “No
person shall, directly or indirectly, in connection with any transaction
with any other person involving trading in futures contracts;—
(a) Employ any device, scheme or artifice to defraud that other person;
(b) Engage in any act, practice or course of business which operates as
a fraud or deception, of that other person; or
14
See David Courtney & Eric C. Bettelhim, An Investor Guide to the Commodity
Futures Markets Butterworths, London, 1986, p. 44.
188 chapter seven
(c) Make any false statement of a material fact, or omit to state a mate-
rial fact necessary in order to make the statement made, in the light
of the circumstances in which they where made, not misleading.
Finally the FIA addresses the issue of falsification of records whether

by directors, employees or agents. It states that, “No director, manager,
officer, auditor, employee, representative or agent of an exchange com-
pany, a futures broker or futures trading adviser shall—
(a) Make or cause to be made a false entry in any book or record or

any report, slip, document or statement of the business, affairs,
transaction, conditions, asset or accounts of the exchange company,
futures broker or futures trading adviser.
(b) Omit to make an entry in any book or record or in any report slip,
document or statement of the business, affaires, transaction, condi-
tions, asset or accounts of the exchange company, futures broker or
futures trading adviser or cause any such entry to be omitted; or
(c) Alter, delete, conceal, or destroy an entry in any book or record or
any report, slip, document or statement of the business, affaires,
transaction, conditions, asset or accounts of the exchange company,
futures broker or futures trading adviser or cause any such entry
to be altered, deleted concealed or destroyed”.
The above provisions are all acceptable and could easily be accommo-
dated in Islamic law given the fact that the attributes of truthfulness,
honesty, justice and righteousness are precisely what Islam requires
every Muslim to observe in all aspects of his life. It is not only required
for legal purposes but also moral and spiritual ones. Thus, dishonesty,
injustice and fraud are regarded as moral wrongs which in addition to
temporal punishment, if any, will be counted as sins and hence, subject
to God’s punishment in the hereafter.
A truthful and trustworthy trader is not only credited in this world as
having good standing and reputation among other traders and potential
customers, but also from the religious point of view, he will be placed
with the Prophets, the righteous and the martyrs in the hereafter.
There are many sayings of the Prophet (PBUH) on this point. He said:
“A trustworthy, honest and truthful businessman will rise up with the
martyrs on the day of resurrection”.15 It is also reported that the Prophet
15
See, Fatḥ al-Bārī, Dār al-Maʿrifah, Beirut, vol. 3, p. 144.
(PBUH) said: “The two parties to a sale have the option to rescind the
contract as long as they have not separated from each other. If both of
them are truthful and honest they will be blessed in their sale but if
they are secretive and liars, then the blessing of their sale will perish”.16
Moreover, these principles are not only required when a Muslim is
dealing with his fellow Muslims but also with non-Muslims.
The above mentioned crimes such as manipulation, fraud, misuse of
information or destruction of information could generally be accommo-
dated under the concept of fraud ( ghish), manipulation, (najash) or other
similar concepts such as buyʿ al-mustarsil, talaqqī al-rukbān and the case
of taṣriyah. Therefore, we will briefly describe these principles.
Najash for instance, refers to a person or institution which only par-
ticipates in a sale by false bidding where an auctioneer has appointed
one or several bidders to take part in bidding, in order to incite the
others to make higher bids exceeding the real value of an article. In
other words, it is when a person (al-nājish) is acting in collusion with
one of the contracting parties in order to raise the price. The prospec-
tive buyer might have thought that his highest bid was the reasonable
value of the article, while, in fact it was not the case. The false bidder’s
agents bidding up the price to incite him to put in another bid, which is
higher, had deceived him and the contract has then been concluded at
that higher price.17 There is no doubt that the auctioneer’s agents were
not genuine traders. They just aim to deceive the real traders about the
real price. This is regarded as a fraudulent statement.
Many aḥ adīth have been reported from the Prophet (PBUH) in
which he has prohibited najash. Thus, it is reported by Ibn ʿUmar that
the Prophet (PBUH) had forbidden al-najash.18 Since there is no clear
law on the effect of najash, neither in the Qurʾān nor in the Sunnah,
different views are held by Muslim scholars. They are all in agreement
that a person who practices najash is committing a sin and he is mor-
ally blamed. However, there is a difference of opinion regarding the
effect of najash on the contract as to whether it will be considered
void or valid.
Another contract which could be a basis for the above provision in
the Futures Industry Act is the contract of mustarsil. It is a contract of
an easy-going customer who does not bargain and who is ignorant about
16
See, Saḥ iḥ Muslim, vol. 4, p. 123.
17
Mohammad ʿAli Bahrum, Misrepresentation: Study of English and Islamic Contract
Law, al-Rahmaniyyah Islamic Mission, Kuala-Lumpur, 1988, p. 156.
18
Saḥ īḥ Muslim with al-Nawawi, Dār ʾIḥyā al-Turāth al-ʿArabi, vol. 2 p. 108.
190 chapter seven
the market price. However, he trusts what the sellers say about the real
value of a particular article.19 The parties involved in the contract have
a fiduciary relationship in which the seller is entrusted with the buyer’s
confidence that he will tell the truth or reveal those facts which he is
acquainted with. It normally happens when the buyer openly reveals to
the seller to sell it at the market price. Upon having such a trust placed
in him the seller is required by law to disclose the true value of the
article and sell it at the market price. Any given price higher than the
normal price would be regarded as fraud.
Fraud is one of the broad Islamic equitable concepts against decep-
tion. This concept is supported by numerous aḥ adīth. In one of these
aḥ adīth the Prophet (PBUH) said: “One who cheats us is not from us”.20
The elements of fraud, as summarized by al-Sanhurī, are exploitation
by means of trickery and the inducement of the contracting party into
the contract.
Finally, the FIA states that any person who contravenes or fails to
comply with any of the provisions of this Part shall be guilty of an offence
and shall be liable on conviction to a fine not exceeding one million ring-
git or to imprisonment for a term not exceeding ten years or both. This
kind of penalty imposed in such offences, from the Islamic perspective
falls under tʿazīr (discretionary punishment). The authorities have full
discretion to impose a suitable penalty based on public interest.
Besides the above measures, the integrity of the market is maintained
through other means as well. Thus, to prevent extreme price change in
one day, most futures exchanges limit the amount of daily movement
of futures prices. This “daily limit” restricts the amount of movement
of price above or below the settlement price of the previous day. For
instance, regarding crude palm oil futures the daily price limit is RM
100 per metric ton above or below the Settlement Prices of the preced-
ing day for all months, except the current month. Limits are expanded
when the Settlement Prices of all three quoted months immediately
following the current month. The daily price limits will remain at RM
200 when the preceding day’s settlement prices of all three quoted
months immediately following the current month settle at a limit of
RM200. It should be noted that a market does not close because a daily
19
Mohammad Ali Bahrum, Misrepresentation: Study of English and Islamic Contract
Law, 126.
20
Ṣaḥ īḥ Muslim, Dār al-Fikr vol. 3, p. 1155.
price is reached; it merely cannot trade past that point. Any amount
of trading can take place at the limit if a trader is willing to take the
opposite side, or of course a price can move down from limit up or up
from limit down.
Moreover, in order to ensure the stability of the market price is not
allowed to fluctuate more than RM 1.00 per metric ton. In addition, the
integrity of the market is protected from excessive speculation through
the speculative position limit where transactions are limited to 500
contracts net long or net short for any delivery month or all delivery
months combined. This is also emphasized by the system of reportable
position, which is limited to 100 or more open contracts, either long or
short, in any one-delivery month. Moreover, a transaction limit where
each single floor transaction shall not exceed 20 lots.
The above regulations helped a great deal in preserving the integrity
and reliability of futures market. However, the futures contracts them-
selves fall short of overcoming the ever-increasing business needs for
more sophisticated instruments of risk management. Thus, the options
contracts were introduced due to their ability to address such need. This
will be discussed next.
THE OPTIONS MARKET
CHAPTER EIGHT
CONCEPT AND SCOPE
Concept of Options
Though the forward contract has overcome some of the problems

associated with risk especially price risk and provided the possibility
of better planning of business, it is still associated with some other
problems, such as the problem of double coincidence, the determina-
tion of price through bargaining which may affect the weaker party to
the contract due to his urgency or information asymmetry and, more
importantly, the problem of counterparty risk by defaulting to honor
his obligation.
These problems have generally been addressed by the futures contract.
However, the futures contracts themselves are still inadequate in some
respects to meet later day business needs. In particular, there were two
inadequacies that have prompted the search for further product inno-
vation. In spite of the fact that while futures enable easy hedging by
locking in the price at which one can buy or sell, it does not allow him
to benefit from subsequent favorable price movements. Though one can
easily reverse a futures position subsequently, the price at which reversal
takes place will be at changed prices. Also there is the possibility that
since there is now full exposure (no more hedge) subsequent unfavor-
able price movements could really hurt.
The second and more important inadequacy is the fact that futures are
unfavorable for the management of contingent liabilities or contingent
claims. There are liabilities or claims on a business entity that could
arise, depending on an uncertain outcome. In other words, contingent
claims or liabilities are business situations that involve at least two levels
of uncertainty. In an increasingly turbulent world such situations have
become commonplace and their management is much more important.1
1
See, Obiyathulla Ismath Bacha, “Derivatives Instrument And Islamic Finance: Some
Thoughts for Reconsideration”, p. 6.
196 chapter eight
Thus, options are needed due to their potential to manage such risks
in a better manner.
Definition
“An option is a contract between two parties in which one party (the
buyer) has the right, but not the obligation, to buy or sell a specified
asset at a specified price, at or before a specified date, from the other
party (the seller). The seller of the option, therefore, has a contingent
liability or an obligation, which is activated if the buyer exercises that
right”. Thus, “An option contract conveys the right to buy or sell an
underlying commodity at a specified price within a specified period
of time”.2
“The important feature is that the buyer of the option is not obliged
to complete the deal, and will do so only if changes in price make it
profitable for him. The buyer of the option is protected from unfavor-
able market movements, yet he is able to profit from movement in the
buyer’s favor. The risk of loss is carried by the seller, who charges the
buyer fee for taking this risk. This fee is called the premium”.3 A simple
example may clarify the above definition. Suppose it is early Septem-
ber and you want to buy a new car. You select the type of the car you
want and go to your local dealer. In the dealer’s showroom you decide
on the exact specification of your car’s colour, engine, size, wheel trim
etc. The car is on offer at £20,000 but you must buy the car today. You
do not have that amount of cash available and it will take a week to
manage a loan. You offer the dealer £100 if he will just keep the car
for a week and hold the price. At the end of the week the £100 is his
whether or not you buy the car. This is a tempting offer and the dealer
accepts your offer. You have entered into an option contract in this case.
It is termed as a call option. This means, you have the right to buy the
car in a week but not the obligation. If during the week you discover
a second dealer offering an identical model for £19,500, you will not
take up your option with the first dealer. The total cost of buying the
car is £19,500 + £100 = £19,600, which is cheaper than the first price
2
Hans R. Stoll & Robert E. Whaley, Futures and Options Theory and Applications,
South-Western Publishing Co., Ohio, 1993, p. 6.
3
Securities Commission and Securities Institutes Education, Malaysian Futures and
Options Registered Representatives (MFORR) course, Kuala Lumpur, 1997, p. 2.
concept and scope of the options market 197
you were offered. However, if you find the car at a cheaper price from
the second dealer, for instance, and buy the car from the first dealer,
the car will cost a total of £20,100. If you decide not to buy at all, you
will lose your £100 to the car dealer. Thus, you are hedging against a
price rise in the car.
On the other hand, if the car you have bought a call option for is great
in demand and there is a sudden price rise to £22,000 and a friend of
yours also wants the same car and hears that you have an option to buy
the car for £20,000 in a week time, after visiting the bank you decide
that you cannot really afford to buy the car and therefore, you sell the
option to buy to your friend for £200. This means the car dealer still
gets his sale, your friend gets the car he wants and you make £100 on
selling your option.4
A somehow more complicated example from the energy market may
guide us to the practical use of options given the fact that the energy
market is one of the markets where the use of options is growing very
rapidly. An oil producer fears an oil price decline, due to hot summer
weather. He is worried he may have to sell his oil too cheaply in the
market. He anticipates that he will sell approximately 1,000 barrels a day
in October at a price of about U$20 per barrel. His expected receipts on
25 days of production are US$500,000. The producer could use futures
that would cost nothing in terms of upfront premium, but could actually
lose him money if his view of the market is wrong. However, there are
certain factors in the market that lead him to believe that there may be
a short term market shortage that may well push up prices temporarily.
He wishes to profit, in case of favorable move of the market, while sav-
ing himself from downside. In order to get an indication prices-trading
situation, he puts up Dow Jones Telerate screens for NYMEX futures
and options.
The current level of the November future is US$17.49 per barrel. The
producer decides to buy 25 put options on the NYMEX Light, Sweet
Crude oil futures with a strike at US$17.50 per barrel. This is slightly
“in the money” (an option with a strike price more advantageous than
the current market level of the underlying) and the cost will reflect
this. The Dow Jones Telerate shows that the last trade went through
at 26 cents per barrel against yesterday’s close at 29 cents. Volatility is
4
See, The Reuters Financial Training Series, Introduction to Derivatives, 1999, John
Wiley & Sons (Asia) Singapore, pp. 10–11.
198 chapter eight
bringing market down, and our oil producer decides to deal through
his broker at 26 cents per barrel. A total premium cost of US$0.26 ×
25,000 barrels, this is US$6,500.
There are two possible outcomes in the next month. Oil prices can rise
or they can fall. Let us assume that the oil price can move +– US$4.00.
First of all, if oil prices rise to US$21.50 the producer will abandon his
option and sell his oil at a higher level. This would benefit him 25,000x
US$1.50 which is equal to US$537,500, a gain of US$7,500 over his
original estimate. But his option premium cost him US$6,500, which
must be deducted to give the final figure of US$531,000, equivalent to
US$21.24 per barrel. Secondly, if oil prices had fallen, to say US$13.50,
from their original level, he would have exercised the option to sell his oil
at US$17.50, netting an income of US$431,000 after premium costs.5
Economic Benefits of Options
The reason that justifies an Islamic legal evaluation of options trading

is the different benefits associated with these financial tools. Some of
these benefits are recognized by some Muslim economists who are very
closely involved in the development of an Islamic financial system and
eager to extract benefits from any human innovation, which eventually
could benefit the Muslim economy. Thus, El-Gārī, for instance, in his
elaboration on the economic advantages and significant economic effects
of options on the stock exchange, maintained that options contribute to
the enhancement of market efficiency and hence fulfillling the objective
of stock markets. In particular, options have the following benefits:
1. They bring about an increase in the liquidity of the market. It is

noted that one of the main advantages of the stock market is its
ability to provide investment opportunity while financing long-term
projects. It can be short-term to the investor, which will increase the
overall investment. The negotiable nature of options contracts leads
to further accomplishment of this objective.
5
See, Francesca Taylor, Mastering Derivatives Markets A Step-by Step Guide to the
Product, Application and Risk, Financial Times Pitman Publishing, London, 1996, pp.
242–243.
2. Options contracts lead to a reduction in the effect of fluctuations in

the prices of securities. Studies have shown that the return gained by
the investor in the long term is usually higher in case the standard
deviation (or yield fluctuation) is smaller, even though the return is
lower in case the annual yield is higher and the standard of devia-
tion (or yield fluctuation) is also higher, because the lean year will
eat up the return of the good years.
3. Investing in the stock market involves a high level of commercial risk
due to price fluctuations and the influence of the moods of investors
on the market. The current political and economic development also
affect stock market investment.
4. Since investment decisions in the stock market almost totally depend
upon future forecasts, any event believed to influence the economic
situation will necessarily affect the market trends. For this purpose,
investors need a method which is similar in nature to insurance.
While preventing the unwanted occurrence investors can minimize
its adverse effects. Options can play such a role.
5. Options give the investor the opportunity to rearrange his investment
portfolio by choosing the most appropriate position for his prefer-
ences related to the risk return trade off. This method of achieving the
required balance cannot always be attained by relying upon buying
and selling shares, bonds and securities, because this may involve
costly fees or it may not be possible all together. An investor can,
through these derivative institutions, choose to take a higher degree
of risk by selling options and obtaining a possibility of high returns.
He may waive the expected yield by buying options instead of being
exposed to high risks.6
In another place El-Gārī stressed that: “there are many legitimate and
Islamically desirable uses of options in stock markets. In particular,
the hedging aspect of options is quite in line with the recognized need
of individuals, which is not contradictory to the sharīʿah. The fact
remains however, that an option contract should not have an existence
independent of sale or lease contract”.7 Moreover, he maintained that
while there is, obviously, plenty of room for speculators in put options
6
See, El-Gārī, “Towards an Islamic Stock Market” Islamic Economic Studies, vol. 1,
no. 1, December 1993, p. 12.
7
El-Gārī, “Stock Exchange Transactions: Sharīʿah Viewpoint”, Encyclopaedia of
Islamic Banking, p. 170.
200 chapter eight
in particular; the need for such a contract is legitimate in most cases.8

He also added that it is necessary to point out the significance of the
availability of options in contracts on the exchange markets consider-
ing the fact that they supplement the operation of these markets. It
is, therefore, not useful to say that we should ignore them since their
existence could create juristic problems. It is better to understand the
real implications of the existence of such contracts and the purpose they
serve and then tax them to achieve what we are seeking by methods
allowing us to avoid the legal problems and complications.9
Fuad al-Omar and Mohammed ʿAbdel Ḥ aq on the other hand, sug-
gested that “with the basic considerations in view, it is proposed that
certain types of derivatives, mainly modified forms of options in stocks
and Islamic financial certificates, will continue to render useful func-
tions under Islamic financing. The modifications are needed to ensure
that the price paid for any option is, in fact, the price of the underlying
asset paid in advance, rather than the price of the option itself. This is
necessitated by the fact that in Islamic financing, an option by itself, is
not recognized as a marketable asset . . . derivatives may also play other
useful role within the framework of Islamic financing. To work out
fully such benefits, and make use of them, substantial practical and
conceptual efforts would be required”.10
On the other hand, Obeyathulla while defining the aim of his paper
entitled “Derivatives Instruments And Islamic Finance: Some Thoughts
for Reconsideration” said, “What is intended here is to provide a deeper
understanding and appreciation of these instruments. How they evolved,
why they are needed, their diversity of use and the serious handicap
that could be posed to Islamic business from ignoring them”.11
Similarly, Obaidullah held the view that “The option is an important
tool of financial engineering. Financial engineers often use options in the
design of new financial contracts or in developing innovative strategies
for financial problems, such as, management of risk”.12
8
Ibid., p. 170.
9
See, El-Gārī, “Towards an Islamic Stock Market”, p. 13.
10
Fuad al-Omar & Mohammed ʿAbdel-Ḥ aq, Islamic Banking Theory Practices and
Challenges, Oxford University Press, 1996, pp. 92–93.
11
Obiyathulla Ismath Bacha, “Derivatives Instrument And Islamic Finance: Some
Thoughts for Reconsideration”, pp. 1–2.
12
Mohammad Obaidullah, “Islamic Options-Engineering Risk Management Solu-
tions”, New Horizon, May, 1998, p. 6.
Other Muslim economists who touched the issue of options and

admitted their benefits in modern finance are Muḥ ammed Shāhid
Ibrāhīm and Tariqqullah Khān.13
These are the testimonies of some Muslim economists regarding the
usefulness of options in Islamic finance. Besides establishing the ben-
efits of options, the opinion of these economists is also important in
clarifying the stand of some scholars or Muslim jurists, especially those
who have discussed the issue of options at the Islamic Fiqh Academy
and concluded that there is no need for options in Islamic economics
because they do not serve any benefit.14 In such a situation the opinion
of Muslim economists is the one which should be considered because
they have knowledge about this particular field whereas the task of the
jurists is to ascertain the conformity of these contracts to the principles
of Islamic law and whether these benefits could justify any formulation
of a legally acceptable Islamic alternative.
Besides these benefits advanced by Muslim economists, we may refer
to some other benefits recorded in the conventional options works. Thus,
it is generally accepted that options provide an efficient mechanism for
allocating risk from those who wish to avoid it and to those who are
interested in bearing it. Options also provide an additional benefit in
allocating risk because the profit function for option is different from the
profit function for the underlying commodity or for a futures contract.
The profits from options are asymmetric. Such an asymmetric payoff
pattern is useful, for example, in dealing with situations that involve
both quantity and price risk.
Consider a farmer who is interested in avoiding the risk associated
with a drop in the price of the commodity that he grows. Before the
harvest, the farmer does not know the size of the crop or the price.
Selling futures against the crop will hedge the farmer against a price
decline if the harvest were known, but a futures hedge will expose him
to risk if the harvest fails and prices increase, because then the farmer
will not have the wheat that he is committed to sell in the futures
market. The farmer will take a loss in acquiring the wheat to deliver
against the futures contracts. Buying a put option on the underlying
13
Islamic Finance. Net. “Islamic Financial Derivatives” (discussion forum) Interna-
tional Journal of Islamic Finance and Services, vol. 1, no. 1, April–June 1999, p. 9.
14
Mohammad Mukhtār al-Salāmī, “al-Ikhtiyārāt” Majallat Majmaʿ al-Fiqh al-Islāmī,
1992, no. 7, vol. 1, p. 241; Siddīq al-Ḍ arīr, “al-Ikhtiyārāt” Majallat Majmaʿ al-Fiqh
al-Isālmī, 1992, no. 7, vol. 1, p. 271.
202 chapter eight
commodity provides a more effective hedge against price and quantity

risk than selling futures. If the prices fall, the put option is exercised
(or liquidated at profit). If prices rise, the put option expires worthless,
and the farmer realises the revenues from his crop regardless of the size
of the harvest. The cost of this one-sided protection for the farmer is
the put option premium.15 It should be noted here that options have
sometimes the same hedging benefits of a futures contract. But they
have also some additional benefits. The two primary advantages of
options (as distinct from futures) are their limited risk characteristics
and their flexibility.
Limited Risk
Buyers of options have limited risk because they can lose no more than
the option premium. Holders of futures positions are required to pay
up losses (in the form of margin as the market moves against them).
These losses are theoretically unlimited. They will keep growing as
the market continues to move unfavorably until the futures contract
is closed out. Limited risk has also benefits to hedgers who desire to
manage their risk. For them the option performs the function of set-
ting either a maximum buying price or minimum selling price for a
future transaction without locking in this price. If the physical market
price is better at the time the transaction takes place, the hedger can
take full advantage of it. Option sellers or writers do not have limited
risk. Their risk position is more like that of the holder of an ordinary
futures contract; but the seller of an option also earns the premium.
Premiums earned by options sellers can be a useful source of income
especially for those who deal in the underlying commodity and wish
to increase their potential investment yield. For such users, holding
the underlying physical commodity reduces the level of risk involved
in selling options.16
15
Hans R. Stoll & Robert E. Whaley, Futures and Options Theory and Applications,
pp. 11–12.
16
Securities Commission and Securities Institutes Education, Malaysian Futures and
Options Registered Representatives (MFORR) course, p. 15.
Flexibility and liquidity

Among the many attractions of exchange-traded options is the fact that
they are standarized. This allows them to be traded freely in the open
market. Having bought an option, a trader can later take advantage of
a favorable move in the market. This aspect of standardization is also
one of the major reasons for the success of options exchanges. In a
financial market, traders want to be able to trade quickly and at a fair
price. They can do this if the market is liquid. A liquid market provides
an efficient and cost effective trading mechanism with a high volume
of trading. Standardising the options contract has helped in promoting
liquidity. The standarized contract has a specific size and expiration date.
The exchange standarizes the exercise prices at which options will be
traded. With fewer exercise prices, there will be more trading available
at a given exercise price. This too promotes liquidity.17
American and European Options
There are two fundamental kinds of options: the American option and
the European option. An American option permits the owner to exercise
at any time before or at the expiration. The owner of a European option
can exercise only at the expiration. Thus the two options differ because
the American option permits early exercise. If the option is at expira-
tion, European and American options will have the same value. They
can be exercised immediately or be allowed to expire worthless. Prior
to expiration, we will see that the two options are conceptually distinct.
Further, they may have different values under certain circumstances.
Consider any two options that are just alike, except that one is
American and the other is a European option. By saying that the two
options are just alike, we mean they have the same underlying commod-
ity or stock and the same exercise price. The American option gives its
owner all rights and privileges that the owner of the European option
possesses. However, the owner of the American option has also the
right to exercise the option before expiration if he desires. From these
considerations, we can see that the American option must be worth at
least as much as the European option.
17
See, Robert W. Kolb, Option The Investor’s Complete Toolkit, New York Institute
of Finance, United States, 1991, p. 7.
204 chapter eight
The owner of an American option can treat the option as a European

option just by deciding not to exercise until expiration. Therefore, the
American option cannot be less valuable than the European option.
However, the American option can be worth more. It will be worth more
if it is desirable to exercise earlier. In this case, the American option
will be worth more than the otherwise identical European option. In
some cases, the right to exercise before expiration will be worthless.
For these situations, the American option will have the same value
as the European option. In general, the European option is simpler
and easier to analyze. However, in actual markets, most options are
American options. We should not associate the names “American” and
“European” in the sense of their geographic locations. In the present
context, the names simply refer to the time at which the option hold-
ers can exercise these options.18 Although the American type of option
seems to be much similar to some of the Islamic contracts, which could
be designed as tools of risk management, such as khiyār al-sharṭ and
bayʿ al-ʿarbūn, where the option could be exercised at any time during
the agreed period, it seems that there is nothing which prohibits the
use of the European form of option if the parties agree to do.
Types of Options
There are many types of options, such as, exotic options, compound
options, options on options, lookback options and others. However, the
present study is only concerned with the fundamental types of options
namely, call and put options. A call option gives the holder the right to
buy an asset within a specific period at certain price. A put option, on
the other hand, gives the holder the right to sell an asset by a certain
date at a certain price. The date specified in the contract is known as
the expiration date, the exercise date, the strike date, or the maturity
date. The price specified in the contract is known as the exercise price
or strike price. The following examples illustrate the above two funda-
mental concepts.
18
Robert Kolb, Understanding Options, John Wiley and Sons, Inc., New York, 1995,
pp. 5–6.
Example of a call option

Consider the situation of an investor who buys a European call option to
purchase 100 Telekom Malaysia shares with a strike price of RM14. Sup-
pose the present stock price is RM12, the expiration date of the option
due after two months and the price of option to purchase one share is 50
cents. The initial paid premium is 5000 cents or RM50. Since the option
is European, the investor can exercise only on the expiration date. If the
share price on this date is less than RM12, he or she will clearly choose
not to exercise. There is no point to buy at price of RM14 a share while
its market value is less than RM14. As such, the investor loses the whole
of the paid premium of RM50. If the share price is above RM14 on the
expiration date, the option will be exercised. Suppose the share price
is RM16. By exercising the option, the investor can buy 100 shares for
RM14 per share. If the shares are sold immediately, the investor would
make a profit of RM2 per share or RM200 ignoring transaction costs.
When the initial cost of the option is taken into account, the net profit
to the investor would be RM150.
It is important to realise that an investor sometimes exercises an
option and makes a loss overall. Suppose in the above example the
stock price of Telekom Malaysia is RM 14. 20 at the expiration of the
option. The investor would exercise the option for a gain of 100x(RM14.
20–RM14)= RM20 and realise an overall loss of RM30 when the initial
cost of the option is taken into account. It is tempting to argue that the
investor should not exercise the option in these circumstances. How-
ever, not exercising the option would lead to an overall loss of RM50,
which is worse than the loss of RM30 in case the investor exercises. In
general, call options should always be exercised at the expiration date
if the stock price is above the strike price.
Example of a put option

Whereas the purchaser of a call option hopes an increase in the stock
price, the purchaser of a put option hopes a decrease. Consider an inves-
tor who buys a European put option to sell 100 B Group’s shares with a
strike price of 90 cents. Suppose, the current share price is 86 cents, the
expiration date of the option is due after three months, the price of an
option to sell one share is 7 cent, and the initial paid premium is 700
cent. Since the option is European, it will be exercised only if the share
price is below 90 cents at the expiration date. Suppose that the share
206 chapter eight
price is 65 cents on this date, the investor can buy 100 shares for 65
cent per share and, under the term of put option, sell the same shares
for 90 cents to realise a gain of 25 cents per share or 2500 cents. Again,
transaction costs are ignored. When the 700-cents paid premium for
the option is taken into account, the investor’s net profit is 1800 cents.
Of course, there is no guarantee that the investor will make a gain. If
the final stock price is above 90 cents, the put option expires worthless
and the investor loses 700 cents.
Exchange Traded and Over-The-Counter Islamic Options
Although the present study is generally based on the assumption that the
Islamic alternative for option trading will be exchange-traded options,
the possibility of an Over The Counter Islamic options is not totally
ruled out. More importantly, it is highly likely that it will precede the
organized market, because over-the-counter markets generally precede
organized exchange markets in futures and options. Thus, in the United
States where the derivatives market developed prior to the inception of
the Chicago Board Options Exchange in 1973, over-the-counter options
on common stocks were arranged by put and call dealers. Moreover, in
over-the-counter market delivery is usually implied. Therefore, given the
fact that the issue of delivery is one of the points of criticisms against
options in general from some Muslim scholars, a start with an over-
the-counter market from Islamic perspective may help in highlighting
the benefits of options in general and paving the way for the organ-
ized market. In addition, it should be noted that the growth in the
organized market in the conventional system does not mean that over-
the-counter market has declined in importance.
In recent years, over-the-counter market trading in derivative financial
instruments has grown dramatically alongside organized markets in
these instruments. This reflects the fact that over-the-counter forward
and option contracts can be tailored to the needs of their retail custom-
ers. Institutions create over-the-counter forward or options contracts to
offset their over-the-counter market positions.19 Thus, the main features
of the two concepts need to be underlined briefly.
19
See, Hans R. Stoll & Robert E. Whaley, Futures and Options Theory and Applica-
tions, p. 15.
Exchange traded options are options that originated and are traded on
formalised and government designated exchanges. In exchange markets,
contracts are standarized and the clearinghouse is the buyer to every
seller of a contract and the seller to every buyer. This eliminates default
risk of option buyers, or the risk of failure of the seller to meet his or
her obligations. Moreover, the standardization process makes it easy for
market participants to deal in these instruments because no discussions
or negotiations are needed to determine the contract specifications. The
only item for negotiation is the price.
Under this arrangement, secondary market trading is possible because
a buyer of a contract, who wishes to liquidate his position, does not
need to search and find the original seller of the contract instead he
may negotiate a transaction with any individual. In over-the-counter
markets, in contrast, contracts are tailored to the needs of the transacting
parties, and no clearinghouse exists. It is a contract between two par-
ties who make their own arrangements for guaranteeing the contract’s
financial integrity. Secondary market trading is very inefficient in the
over-the-counter markets because a buyer, who wishes to liquidate his
position, is obliged to seek an agreement with the original seller of the
contract.20
A Brief History of Options Trading
Market players have used options on commodities and stock for several
centuries. During the Dutch Tulipomania events of 1630s, tulip dealers
granted growers the right to sell their tulip bulb crop for a set minimum
price. For this privilege, the grower paid the dealer a fee. Tulip dealers
paid a fee to the growers also for the right to buy the bulb crop at an
agreed maximum price.
By the early 1820s, the London Stock Exchange was trading options
on shares, and in the 1860s, there were over-the-counter options markets
on both commodities and stocks in the US. The early exchange traded
and over-the-counter options markets were not free from problems such
as lack of regulation, contract default etc. The market got a bad name
20
See, Franklin R. Edwards & Cindy W. Ma, Futures and Options, McGraw-Hill, Inc.,
United States, p. 491; Hans R. Stoll & Robert E. Whaley, Futures and Options Theory
and Applications, pp. 14–15.
208 chapter eight
because of certain practices. One of these involved brokers being given

options on a certain stock as an inducement, for them, to recommend
the stock to their clients.
In the early 1900s, a group of firms set up what was known as the Put
and Call Brokers Dealers Association. The aim of this association was
to provide a mechanism for bringing buyers and sellers together. But
it suffered from two deficiencies. First, there was no secondary market.
Secondly, there was no mechanism to guarantee that the writer of the
option would honor the contract and in case of default the buyer had
to resort to a costly lawsuit.
Exchange traded futures contracts on commodities had been estab-
lished on a number of exchanges in the 1860s, but options contracts
on commodities were not available for about a century or so. Exchange
trading on US stocks started in 1973 when the Chicago Board Options
Exchange was established. In the 1980s, markets developed for options
in foreign exchange, options on stock indices and options on futures
contracts. It should be noted that the development of options contracts
on commodities and shares has an early and separate development from
that of other traded options.21 This distinct development has also had
its repercussions on other aspects of option trading. Thus, as it will be
explained later, the present study will be limited to options on com-
modities and shares.
Scope of Options
The scope of the discussion about options from an Islamic perspective

needs to be defined, because many areas of investment in the conven-
tional system using options may not be acceptable in Islam. For instance,
interest rate option is obviously out of consideration. Similarly, index
options are pure gambling as many Muslim jurists and economists
described them. El-Gārī, for instance, says,
Obviously this is pure gambling. What one buys or sells (when one buys
an index option) is a chance to win an amount of money not specified
(the difference between current price and future price). Gambling in the
21
The Reuters Financial Training Series, Introduction to Derivatives, p. 71, John Hull,
Introduction to Futures and Options Market, Prentice Hall, Inc., 1991, p. 5; Franklin R.
Edwards & Cindy W. Ma, Futures and Options, p. 488.
sharīʿah is not permissible even for charitable purposes, let alone profit
making.22
Currency options is another area, which could not be admitted in Islamic
finance. Some very authentic aḥ adīth are clear that currency exchange
must be hand-to-hand and any postponement to the future is illegal
while the idea of an option, in contrast, is based on future expectations.
Therefore, there is no room for compromise and the rules of the sunnah
must prevail. Some writers have suggested the possibility of options in
currency trading based on the opinion of early scholars. According to
them it is possible to trade fulūs on a in future basis because fulūs were
not genuine currency at that time but gold and silver. Thus, Obaidullah,
for instance, says,
currency options pose some challenges for scholars and researchers and
there are divergent views on the issue of the prohibition of ribā in currency
exchange. The divergence is due to the process of analogy (qiyās) in which
efficient cause (ʿillah) plays an extremely important role. The process of
analogy is needed since gold and silver, which performed the function of
money in the early days of Islam, have been replaced by paper currencies.
It is a common efficient cause (ʿillah) which connects the object of the
analogy with its subject in the exercise of analogical reasoning. The appro-
priate efficient cause (ʿillah) in the case of currency exchange contracts has
been variously defined by the major schools of fiqh. Accordingly, jurists
equate currency exchange with bayʿ al-ṣarf in which spot settlement or
qabḍ by both the parties on the spot is insisted upon. Hence, options are
automatically ruled out. Some others, primarily belonging to the Ḥ anafī
school permit deferment of obligation by one party or bayʿ al-salam in
currencies and thus admit the possibility of options.23
However, as it was discussed earlier in this study, the Ḥ anafī opinion to
which Obaidullah is referring to, is based on the ground of an analogy
between fulūs and modern paper money. However, there exists discrep-
ancy in this. Paper money is the only medium of exchange nowadays
similar to gold and silver in the early days of Islam while fulūs when
introduced were only a medium of exchange for less valuable items,
while gold and silver were the major medium of exchange. Moreover,
the idea of allowing deferred trading in fulūs is keenly contested even by
the early jurists and the opinion, which fulfills the spirit of the sharīʿah
22
El-Gārī, “Stock Exchange Transactions: sharīʿah Viewpoint”, Encyclopaedia of
Islamic Banking, p. 170.
23
Mohammad Obaidullah, “Ethical Options in Islamic Finance”, p. 79.
210 chapter eight
and its objectives goes that deferred trading in fulūs is illegal. Thus, there
is no possibility of currency option in Islamic finance and the scope of
this study will be limited to options in commodities and shares.
Thus, addressing options contracts from an Islamic point of view
means, first of all, assessing the compatibility of these contracts with the
sharīʿah and identifying the points of difference with Islamic principles.
Secondly, looking for the Islamic alternative, among the existing types
of contracts that could produce the same benefits without contraven-
ing the principles of Islamic commercial law. However, if the existing
Islamic types of contracts fail to provide the same benefits provided by
the conventional options, is it possible to modify the conventional aspect
of options so that it could comply with Islamic principles? However, if
this step is not suitable, is it possible to extend the concept of some of
the existing Islamic types of contracts within the framework of Islamic
principles and based on the theory of freedom of contract and condi-
tions in order to accommodate the already acknowledged benefits of
conventional options?
Another issue that has been repeatedly raised in the prohibition of
options is the claim that conventional options are pure gambling, which
has no place in Islamic Finance. It should be noted that the concept of
gambling and gharar are, sometime, confused to each other. Moreover,
the claim of gambling in modern transactions is not limited to options.
Similar claim was also made against the stock market transactions
considered by some scholars as merely gambling which does not serve
any useful economic purpose.24
Options and Gambling
Concept and Definition

Gambling is generally defined as the voluntary risking of a sum of money
called a stake, wager or bet, in the outcome of a game or other event.25
Sears J in the Richardson Greenshields of Canada (Pacific) LtD v. Keung
Chak-kiu and Hong Kong Futures Exchange Ltd case taking wagering
to be synonymous with gambling, supported the classical definition of
24
See, Mohammed Ali El-Gārī, “Towards an Islamic Stock Market”, p. 8.
25
The Encyclopedia Americana, International Edition, Grolier Incorporated 2001.
Hawkins J in Carlill v. Carbolic Smoke Ball Co that the prerequisite of

a bet or a wager is that two parties enter and one wins, one loses:
A wagering contract is one by which two persons, professing to hold
opposite views touching the issue of a future uncertain event, mutually
agree that, depend upon the determination of that event, one shall win
from the other, and that other shall pay or hand over to him, a sum of
money or other stake; neither of the contracting parties having any other
interest in that contract than the sum or stake he will so win or lose, there
being no other real consideration for the making of such contract by either
of the parties. It is essential to a wagering contract that each party may
under it either win or lose, whether he will win or lose being dependent
on the issue of the event, and, therefore, remaining uncertain until that
issue is known. If either of the parties may win but cannot lose, or may
lose but cannot win, it is not a wagering contract.
Sears J also maintained that:
Gambling in law is either gaming or betting, or in colloquial terms reckless
expenditure, but this element of risk does not convert a financial transac-
tion into gambling. Investing in futures contracts is like dealing in any
matters which may or may not occur in the future where one does not
know the outcome and where a profit or loss may be made.26
It is worth noting that it is the characteristic of being genuine com-
mercial transaction that marks the difference between betting, wagering,
gaming or gambling and entering into a future contract. The transaction
is genuine because it was an open type commercial transaction, con-
ducted in a publicly controlled exchange where what is being purchased
is known to all person, with no hint of it being disguised as something
else. Even the purpose of speculation does not transform the transaction
into gambling. From the point of view of other parties of the futures
contract such as the broker, the clearinghouse on which the contract is
settled or offset, there is a genuine commercial transaction. The broker
for instance, is not standing to lose or to gain but to earn a commission.
Even the fact that only about two per cent of futures contracts involve
physical delivery of the underlying commodity does not convert it into
gambling as long as the parties did intend to enter into contract which
may result into in delivery of acceptance of delivery.27
26
[1989] 1 HKLR, 476.
27
See, Paul Latimer, “Futures Contracts and Gaming Laws”, The Company Lawyer
International, Australia, vol. 14, no. 3, pp. 67–71.
212 chapter eight
There is no doubt that the Qurʾān prohibited gambling (al-māʾidah

5:90) but, the issue is whether a specific transaction involves gambling
not. The underlying object of a contract of gambling is risk and noth-
ing else. It does not relate to the exchange or production of any goods
or services.
The best example to illustrate this issue is the arguments and the
counter arguments advanced in the discussion forum of the Islamic
Fiqh Academy on the issue of options. Although the present study has
addressed the issue of gambling briefly while addressing the issue of
speculation, it is necessary to touch on some of these issues here due
to their close link to options trading in particular.
This is also due to the fact some of the distinguished scholars, in
that forum on options organized by he Islamic Fiqh Academy, adopted
the issue of gambling as one of their argument against options. Al-
Salami for instance said, “the closest thing to option in my opinion is
gambling. The chance of each party in the contract to gain is based on
the loss of his counterpart according to the movement of the market
whether up or down”.28 In support of this opinion Taqī al-ʿUsmānī went
further saying, “Options are not identical to any of the known Islamic
contracts. Moreover, the definition of gambling and that of options are
similar because the options trader is paying his money in exchange
for a risk . . . it is like the contract of insurance”.29 Adding his voice to
that of his colleagues al-Ḍ arīr said, “option in currency trading is not
a point of discussion because even the ordinary option of stipulation
or khiyār al-sharṭ, where the option is not exchanged with any thing,
is not allowed in currency trading. Therefore, the illegality of currency
option is obvious . . . concerning options in stocks, it is clear that one
who is buying the stock of a specific company with option has no inter-
est in owning the stocks of this company. It should be added that the
legality of stock companies trading with the intention of gaining from
price differential is a point of dispute between contemporary Muslim
jurists, and al-Ḍ arīr added, I prefer the opinion, which prohibits it even
if the exchange does not involve option. Hence, when it is with option,
it is more obvious and definitely illegal. Option in currency trading and
28
Majallat Majmaʿ al-Fiqh al-Islāmī, 1990, vol. 1, p. 568.
29
Ibid., p. 572.
stocks is similar to gambling and there is no difference between it and

looking for price differential”.30
However, the above argument has been opposed by al-Taskhīrī in
his reply, he says, “to describe these contracts as gambling needs strong
evidence (which is not the case with the issue in question). Moreover,
some have described insurance contract as gambling although the gap
between insurance contract and gambling is very wide . . . indeed some
may use these contracts to matters, which are close to gambling.31 But
this should not affect the essence of the contract.
To defend his position, al-Salami replied that options are not like
the ordinary known gambling but it could be used sometimes for that
purpose.32 Then al-Ḍ arīr takes the defense saying, “In reality options are
not gambling but have some similarities with it. Moreover, describing
option contracts as a gambling is not from us. This is the description
of some American newspapers describing the American society as a
casino of gambling, for it deals with options especially options in indices,
which are based neither on commodity nor stocks nor any thing else
as underlying assets, as it is quoted by some of the papers presented in
this forum. Then how this cannot be described as similar to gambling
if it is not the sister of gambling?33
In a direct reply to this argument, Mohammad Muʾmin says,
it has been repeated that the contract before us is similar to gambling, what
is prohibited is gambling and not what is similar to gambling. Similarly
what is banned is ribā and not what is similar to ribā. Moreover, winning
profit from gambling is one sided, because one party gains without giving
anything in return while in this case the premium is given in exchange
to the right of option and the option’s receiver benefits from it to manage
his risk. Then, how receiving some thing in exchange of something else is
illegal? In addition, some scholars have maintained that the objective of
such transaction is only “the benefit” or al-ribḥ and nothing else (which
is in this case the premium and the option). However, if the objective
of a contract is the profit or the gain with the fact that the premium
and the option are the means of this benefit, then on what ground such
a transaction should be prohibited. Most of the contracts from which
people are gaining are contract over an ʿayn (physical thing) or manfaʿah
(usufruct) like the case in ijārah. Furthermore, it is contented that this
contract involves risk. However, to a certain degree, risk is present in some
30
Ibid., pp. 576–577.
31
Ibid., p. 582.
32
Ibid., p. 584.
33
Ibid., p. 589.
214 chapter eight
legally accepted sale and leasing contracts too. Do we conclude that these
contracts are illegal. In fact, risk is present in every contract of sale and
a person could lose or gain from this or that contract. Do we conclude
that these contract are illegal?34
Intervening in this juridical debate some Muslim economists made
some clarifications. Thus, Sāmī Ḥ ammoud says, “to say that this con-
tract is similar to gambling is not true. It is not a gambling contract in
the eyes of one who is expert in the field”.35 Lastly, Mundhir Khaf and
ʿAbd al-Salām al-ʿAbādī describes the options contract pointing to the
difference between options in commodities and stocks on one hand
and that of currencies and especially stock indices on the other. More
importantly, underlining the fact in option trading, there is an exchange
of a right with money, which is not definitely the case in gambling.36
Although the right position seems to be clear from the above expo-
sition of the different views, however, a brief comment is necessary to
point out the implications of some of the above statements to the study
of Islamic finance and specially that of options, commodities and stocks.
First of all, although the opponents of options have realised a genuine
difference between option in commodities and stocks on one hand, and
that of currency and stocks indices on the other, they have not made
any attempt to evaluate the two cases differently which resulted in a
total confusion and generalization.
Secondly, they have drawn an analogy between options and insurance
to invalidate options. However, although Muslim jurists have opposed
the conventional form of insurance, a continuous effort to formulate the
Islamic alternative was the objective of these jurists since then. Unfor-
tunately, this was not the case with options where many have claimed
that there is no need for such contracts for the Muslim economy and
therefore, there is no need for an Islamic alternative.
Thirdly, al-Ḍ arīr argued that he opted for the opinion that trading
in stocks companies is illegal if the traders are looking for profit from
price differentials and not the ownership of the of the stocks. However,
if such an opinion is considered, it will not only prohibit commodity
and stock trading either with options or without it. Besides, it will lead
34
Ibid., p. 590.
35
Ibid., p. 593.
36
Ibid., pp. 595–598; pp. 603–605.
to the impossibility of developing any kind of an Islamic commodities

and stocks market.
It is worth noting that al-Ḍ arīr’s argument that trading in stock of
companies is illegal if traders are looking only to gain through price
differentials and not the ownership of the stocks is unacceptable. How-
ever, it could be used at the same time as a counter-argument to those
who allow stock companies trading despite the fact that it involves the
idea price differentials while they prohibit options trading on the same
ground.
Fourthly, it seems that the reason of labelling such a transaction as
gambling might be their failure to differentiate between risk and gam-
bling or the claim that a “pure right” is not property and, therefore,
there is no contract of exchange at all in options trading. However, this
claim has been proven wrong as elaborated above.
Thus, it is clear from the above statements that the claim that option
in commodity and stocks, in particular is a kind of gambling, is
unfounded because there is no legal or economic evidence to support
that. It is interesting to note that the opponents of options in the above
are argument also among those who opposed the legality of ʿarbūn
during its discussion by the Islamic Fiqh Academy on the ground that
one of the parties is benefiting from the other without any exchange
and it is harām.
On the other hand, to consider options as a kind of gambling, because
the parties involved are looking for price differentials, may also apply to
khiyār al-sharṭ or ʿarbūn, which can also be used for that purpose. Yet, an
importer may purchase some commodities from another trader residing
in another country with khiyār al-sharṭ of three months for instance.
He is concluding such a deal not because of the fear of being cheated
by the seller as it is the fact in the ḥ adīth of Ḥ ibbān Ibn Munqidh about
khiyār al-sharṭ, but rather to benefit from a good market if his expecta-
tion are correct and confirm the contract. However, if his expectations
are proven to be wrong, he will leave the term of the option to expire
without confirmation since the price of the commodity in question
falls sharply during this period, and therefore, he will not confirm the
contract to face real loss. A similar scenario can also develop through
ʿarbūn. However, we do not think anyone will venture to declare khiyār
al-sharṭ or ʿarbūn in such transaction illegal on the ground of being
used for price differentials unless we follow al-Ḍ arīr’s view that trading
in stock of companies is illegal because the traders are looking only to
216 chapter eight
gain through prices differential and not the real ownership of the of
the stocks. And if this is the ground to invalidate options then, khiyār
al-sharṭ, ʿarbūn or trading in stock companies, as practiced nowadays
by Islamic financial institutions, should be declared illegal.
Some other scholars on the other hand, did not see even speculation
as gambling if it is based on information and not on manipulation and
distortion of the market. In other words, a limited kind of speculation
is an ordinary market practice and could not be equated to gambling.
Thus, Ahmad Abdel Fattah El-Askar says:
Speculation has mistakenly been equated with gambling. This need not
be the case. Speculation involves a great deal of computation, which in
the light of the highly developed computation techniques of today can
hardly be a game of chance. It is a process that relies on the analysis of a
lot of economic and financial data, companies financial reports, political
decisions, information about management skills and aptitude as well as
the personal profile of decision makers. All this information is analyzed
before a decision of buying and selling securities that requires a great
deal of knowledge and skills. But the notion of equating speculation
with gambling is a misconception that is inherited from the past when
speculation was more of a personal guess than a very careful calcula-
tion. Nor can the stock exchange be equated with gambling casinos. It is
a complete market in which very little, if ever, is left to chance. Neither
can the market afford a mere chance in its operations nor can countries’
economies sustain it.37
Similarly, commenting on the issue of gambling on options, Obaiyathul-
lah maintained that the argument profits from options are “unearned”
is an invalid argument. It ignores the fact that both the buyer and seller
take on risk and that the buyer has at stake the premium he has paid.
Furthermore, the change on an option’s value arises from changes in
the underlying asset value and not by chance. If such gain is unearned,
then it implies that all capital gain income could also be considered
unearned. The second argument that options involve gharar since there
is potential for default totally ignores the fact that Exchanges place
margin requirements on sellers of options precisely to prevent default.
Notes that buyers of options would by definition not default because
37
Ahmad Abdel Fattah El-Ashkar, “Toward An Islamic Stock Exchange in a Transi-
tional Stage”, Islamic Economic Studies, vol. 3, no. 1, December 1995, pp. 82–83.
their maximum possible losses is the premium, all of which is fully paid
for at the time of purchase.38
In addition, Abū Ghudah as Sharīʿah adviser of one of the leading
Islamic financial institution, namely Dallah al-Barakah Group main-
tained that looking for price differential by buying some beneficial assets,
then selling them before getting their associated profit or after that, is a
legitimate and legal objective; because it is a trade aiming at selling what
one has bought at higher price. However, some contemporary Muslim
jurists, as Abū Ghudah notes, are of the opinion that buying and selling
shares with the intention of getting the price differential is a kind of
transaction on currencies, given the short period between the sale and
purchase offers, and there is no value added from such a transaction
except the objective of looking for price differential. Such an argument,
as Abū Ghudah argues, ignores the nature of a share, which is part of
whole asset of the company, which shall be sold at higher price than
the price of purchase.
In fact, trading shares with the objective of getting price differential
is not without benefits. It helps in stimulating the economic activities
whether it is a bilateral or a collective transaction. However, these ben-
efits could not be appreciated unless we look into the different activities,
preceding or following the purchase. Thus, the price given by the buyer
of these shares allows the seller to embark in new forms of commer-
cial activities such buying shares from another companies and in turn,
creating liquidity in the market, which will benefit the participants in
the market in different forms. If this liquidity is impossible in a market,
investors may not have taken the risk of locking their money in the
shares of these companies. Thus, investors are free to go in or out at
any time and, each move has its causes and objectives. This is similar
to what is reported from the prophet to have said: “let people benefit
from each other”.39
The fear from the harm which will be created by this rapid form of
transaction or the problems that had happened in certain countries,
under certain circumstances were the result of negligence of the sharīʿah
regulation in shares trading. Companies are trading in futures while they
are still in the stage of formation just after the collection of money for
38
See, Obiyathulla Ismath Bacha, “Derivatives Instrument And Islamic Finance:
Some Thoughts for Reconsideration”, p. 14.
39
Ṣaḥ īḥ Al-Bukhāri with Fatḥ al-Bārī, vol. 4, p. 372.
218 chapter eight
subscription or such companies are still trading while in reality they

are floating of debt or practising selling short.
On the other hand, the argument that this form of rapid trading is
only created by the spread of false information, political event, publica-
tion of economic expectation and so on, have also its effect to individual
business without affecting its legal status. Moreover, the investor who
is selling his shares may want to avoid or minimize an imminent loss
when the shares prices of the company start declining and with the
possibility of decline further. Then, where is the evidence from shariʿah,
that will prevent him from getting rid of these shares if the exchange is
done according to shariʿah regulations without manipulation, cheating
or gharar?40 Thus, it is clear that the claim that options trading is a kind
of gambling is unfounded.
Given the simplistic approach taken by some of the participants in the
discussion on the relationship, if any, between options and gambling, a
general remark regarding the methodology adopted by the Islamic Fiqh
Academy in formulating Islamic law, so far, is necessary.
It should be noted that a comprehensive development of Islamic
finance in general or the admission of certain types of derivatives
instruments is almost impossible without the cooperation of the Islamic
Fiqh Academy which is the most influential institution in formulat-
ing the rules of Islamic law related to commercial activities. Although
the Academy had done valuable contributions in this direction so far,
however, several remarks need to be made here.
Firstly there is a tendency to stop the discussion as soon as the time
allocated for the discussion of a specific issue expired saying that “may
Allāh gives his blessing to what have already been discussed”!!!41 This
was for instance, the argument of the chairman during the discussion
about futures contracts. Despite the fact that some of the participants
have proposed the postponement of the resolution on the issue because
some of the issues have only been clarified through the discussion and
not trough the papers presented. Indeed an expedited resolution may
not be immune from some shortcomings.
Secondly, many participants at the Academy forums opposed the
discussion of any issue upon which there is already a decision from
40
For more detail see, ʿAbd al-Sattār Abū Ghuddah, “al-Istithmār fi al-Ashum wa
al-Wihdāt al-Istithmāriyyah”, Majallat Majmaʿ al-Fiqh al-Islāmī, pp. 112–115.
41
See for instance, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 7, vol. 1, p. 650.
the Academy.42 For example, certain participants objected to discuss the

issue of reselling salam prior to taking possession that was raised by
other participants during the discussion about ʿuqūd al-munāqaṣāt. It
was argued that there is no reason for raising the difference of opinions
in such an issue since a previous resolution of the Academy maintained
that that it is illegal to resell salam prior to taking possession.43
Indeed it is impossible to continue repeating the same thing about a
single issue. However, if a person has new ideas or if he discovered some
shortcomings in the previous resolution, or he is not one of the partici-
pants in the discussion, where the prohibitive resolution was taken, he
shall be given the opportunity to articulate his point. The resolutions
of the Academy are just ijtihādī ruling and an ijtihād could be reversed
whenever new evidence appears especially in these issues affecting not
only individuals or countries but he whole Muslim Ummah.
Finally, it is imperative to increase the number of economists associ-
ated with the Academy in order to give participants clear understating
of the issue discussed and to explain its economic impact to the Muslim
economies. For instance, the main purpose of derivatives instruments
is risk management. However, the issue has not been emphasized by
the papers presented or highlighted during the discussion while the
admission of a specific contract into Islamic law will not depend only
on its contractual form but also its objectives and the benefits behind.
Yet, at present there are some Muslim economists helping the Academy
and they deserve to be thanks for their effort, but given the fact that the
resolutions of the Academy are affecting the whole Muslim Ummah a
wider consultation is needed.
The present study will address the above possibility by studying the
possible Islamic alternatives: how they could be devised to be tools of
risk management and how some necessary modifications can be imple-
mented. The first possible Islamic alternative to conventional options
is khiyār al-sharṭ and its variation khiyār al-naqd. However, major
problems may arise here especially with the issue of taking money in
exchange for giving the option and is it possible to trade the option as
a separate entity from the underlying asset? Moreover, if any change in
khiyār al-sharṭ and khiyār al-naqd is not possible, could these contracts
be expected to achieve the benefits of conventional options? There is a
42
See for instance, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 9, vol. 2, p. 163.
43
See, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 9, vol. 2, p. 334.
220 chapter eight
conflicting analysis on these matters, some time, aggravated by some

degree of misunderstanding of the major legal issues in conventional
options on the one hand, and a narrow interpretation of the concept
of khiyār al-sharṭ and khiyār al-naqd on the other.
The second possible Islamic alternative is bayʿ al-ʿarbūn. The pos-
sibility of an Islamic alternative is more promising here than it is with
khiyār al-sharṭ and khiyār al-naqd. Thus, despite the general objection
of some Muslim jurists to creating an Islamically acceptable form of
option contract based on ʿarbūn, some Muslim economists have already
acknowledged that the general form of ʿarbūn could serve as an alterna-
tive to a call option. Moreover, a reversed ʿarbūn could also serve as a
put option as it will be elaborated later. However, for lack of genuine and
detailed legal discussion about this possibility, Muslim economists have
not made sufficient effort to exploit it. On the other hand, if ʿarbūn is
proposed to serve as an alternative to conventional options, is it possible
to use it in commodities, shares, currencies trading, or in murābaḥ ah
and salam for instance, as a tool of risk management?
The issue of giving a premium in exchange for the right to options
as separate contract besides the price in exchange for the underlying
asset is one of the most commonly raised problems concerning options.
It is maintained that the subject matter in such a transaction is a pure
right or ḥ aq mujarrad, which is not considered as property by many
scholars, and therefore, it cannot be the subject matter of a contract.
However, a thorough investigation shows that the majority of early
Muslim scholars consider a right as a property although the vast major-
ity of contemporary jurists prefer the opinion of the Ḥ anafīs, may be,
on grounds of taqlīd.
Moreover, the importance of the issue lies in the fact that even if
khiyār al-sharṭ and khiyār al-naqd on the one hand, and ʿarbūn on the
other, have been accepted as the Islamic alternative to conventional
options, their use will be limited to the primary market. To extend this
possibility to the secondary market requires the sale of an option as a
separate entity, which is not possible if a right cannot be the subject
matter of contract. One major study which addressed the issue of a right
as a property in connection with options and passed a negative judg-
ment, is the study conducted by the Islamic Fiqh Academy, which is by
no means a convincing study, as we shall see. Yet, some other studies
have already endorsed the legality of selling a pure right like that in
conventional options based on the theory of freedom of contract, but
it seems that more evidence and elaboration are needed to rebut the
different arguments against the sale of a pure right. Thus, the issue of
a right as a property needs a detailed investigation.
An investigation about options from an Islamic point of view would
not be complete unless the issue of gambling in options and the claim
that options trading is illegal because it involves the combination of two
contracts in one transaction is tackled. Thus, in the following pages the
present study elaborates on these issues and assesses the possibility of
options trading in Islamic law and finance.
CHAPTER NINE
KHIYĀR AL-SHARṬ , RISK MANAGEMENT AND OPTIONS
The first Islamic alternative to conventional options advanced by mod-

ern Muslim jurists is khiyār al-sharṭ or option of stipulation. Among
those who have drawn an analogy between the two concepts and con-
cluded that conventional options could be accommodated in Islamic
law through khiyār al-sharṭ are Kamālī,1 Youssouf Sulaimān,2 ʿAli Abd
al-Qādir,3 Shahhāt al-Jundī,4 and Obaidullah.5
Meanwhile, some other scholars have made an analogy between the
two concepts but concluded that there are no grounds for legalizing
options by making an analogy to khiyār al-sharṭ or option of stipulation.
Yet, the theory of contract in Islamic law has discussed the notion of
option within the framework of giving the contracting parties a right
whether to confirm the contract or to cancel it within a determined
period. Thus, around thirty-three different types of options with varying
degrees of importance have been identified in Islamic law.6 However,
of these various kind of options, the one that is potentially promising
in designing new financial instruments is khiyār al-sharṭ or the option
of stipulation and its variant or subdivision, namely khiyār al-naqd or
the option of paying the price as an indicator of the confirmation of
the contract.
Although the possibility of designing new instruments as an alterna-
tive to the conventional options has been addressed to some extent by
1
Islamic Commercial Law: An Analysis of Futures and Options (unpublished Manu-
script), Law Center International Islamic University.
2
“Raiʾ al-Tashrīʾ al-Islāmī fi Masāʾil al-Burṣa h”, al-Mawsūaʿ al-ʿIlmiyyah wa
al-ʿAmaliyyah lil bunūk al-Islāmiyyah, Cairo, al-Ittihād al-Dawlī lil-Bunūk al-Islāmiyyah,
1982, vol. 5, pp. 428–445.
3
Taʾqīb ʿalā Raiʾ al-Tashrīʾ al-Islāmī fi Masāʾil al-Burṣah”, al-Mawsūaʿ al-Ilmiyyah
wa al-ʿAmaliyyah li a-bunūk al-Islāmiyyah, Cairo, al-Ittihād al-Dawlī lil-Bunūk
al-Islāmiyyah, 1982, vol. 5, pp. 438–443.
4
Muʿāmalāt al-Burṣah fi al-sharīʿah al-Islāmiyyah, Cairo, Dār al-Nahdah, 1988.
5
“Financial Engineering with Islamic Options”, Islamic Economic Studies, vol. 6, no. 1,
November 1998, pp. 73–103.
6
See Abū Ghuddah, al-Khiyār waʾAtharuhu fi al-ʿUqūd, Dallah al-Barakah, Jeddah,
n.d.
KHIYĀR AL-SHARṬ , risk management and options 223
some scholars before, the introduction of the option of paying the price
or khiyār al-naqd will add a new dimension to the possibility of risk
management through the theory of khiyārāt in Islamic law. Hence, we
discuss the legal aspect of these contracts and the possibility of using
them as an alternative to the conventional options.
Concept of Khiyār Al-Shart ̣
Khiyār al-sharṭ is an option in the nature of a condition stipulated in

the contract whether to confirm the contract or to cancel it in a specific
period.7 It provides a right to either of the parties, or both or even to
a third party to confirm or to cancel the contract within a stipulated
period of time.8
The basic validity of khiyār al-sharṭ is proven by the authority of a
ḥ adīth in which it is reported that Ḥ ibbān Ibn Munqidh complained
to the Prophet that he was the victim of frequent cheating in sale. The
Prophet responded, “When you concluded a sale, you may say there
must be no fraud and you reserve for yourself an option lasting for
three days”.9 It is also asserted by the ḥ adīth of ʿAbd Allāh Ibn ʿUmar to
the effect that “the parties to a contract of sale have a right of option as
long as they are not separated except in a sale that is subject to option”.10
Another general ḥ adīth is also cited in this regard. “Muslims are bound
by their stipulation unless it be a stipulation which declares unlawful
what is lawful or permits what is unlawful”. Besides the above ḥ adīths,
some scholars have even reported ijmāʿ as a proof of the validity of khiyār
al-sharṭ. Al-Nawawī, for instance, said in this regard “The strongest basis
for khiyār al-sharṭ is ijmāʿ . . . and it is enough”.11 A similar statement has
been recorded by Ibn al-Humām.12
However, Ibn Rushd has reported the disagreement of al-Thawrī,
Ibn Shubrumah and some of the Zŭhirī school especially Ibn Ḥ azm
who has advanced several arguments to back his claim. However, one
7
Ibid., p. 194.
8
ʿAbd al-Raḥmān al-Jizarī, al-Fiqh ʿalā al-Madhāhib al-ʿArbʿah, Dār al-Rayyān li
al-Turāth, Cairo, n.d., vol. 3, p. 155.
9
Sahīh Al-Bukhāri with Fatḥ al-Bārī, vol. 4, p. 337; Sahīh Muslim with Sharḥ
al-Nawawī, vol. 10, p. 177.
10
Saḥ īḥ Al-Bukhāri with Fatḥ al-Bārī, vol. 4, p. 326.
11
Al-Nawawī, al-Majmūʾ Sharḥ al-Muhazzab, vol. 9, p. 225.
12
Ibn al-Humām, Fatḥ al-Qadīr, vol. 5, p. 111.
224 chapter nine
may say perhaps there was a little disagreement among scholars at the
beginning on khiyār al-sharṭ but has been accepted by ijmāʿ. What is
important here in relation to our discussion is that the legality of khiyār
al-sharṭ is not a point of contention among Muslim jurists nowadays.
It is worth mentioning that the option of stipulation is only valid with
regard to non-usurious sales. In addition, khiyār al-sharṭ is not applicable
to salam, and any option would make the contract of salam null and
void according to the majority. The Mālikīs allow such an option if the
period is very limited based on their opinion that the price in salam
could be deferred for three days after a mutual consent and even longer
if it has not been the subject of mutual consent during the conclusion
of the contract. As for usurious items such as currencies and barter
sale of foodstuffs, they must be concluded on the spot without delay.
Therefore, khiyār al-sharṭ is not applicable to currency trading. Yet, some
Muslim scholars have attempted to assign it to the modern paper cur-
rency, the same rule of fulūs as discussed by early scholars and where
some scholars have allowed khiyār al-sharṭ in fulūs, maintaining that as
they are not currency they are not usurious. However, we have already
demonstrated the weakness of this opinion and the discrepancy of the
analogy of considering paper money as a kind fulūs while discussing the
possibility of trading gold on a forward basis. Therefore, khiyār al-sharṭ
has no place in currency trading in all circumstances.
The Terms of Khiyār Al-Shart ̣
There are three main opinions on the matter. Abū Ḥ anīfah, Zufar and the
Shāfiʿi held that the option should not exceed three days as it is specified
in the hadīth, because khiyār al-sharṭ is allowed contrary to the norms
of qiyās as an exception. Therefore, no liberal recourse to it should be
allowed. In other words, khiyār al-sharṭ is initially against the objective
of sale, which should be binding immediately after its conclusion, but
the sharīʿah allowed it on the basis of necessity. Therefore, it should be
limited to the minimum possible period, which is three days.13
The Mālikis, on the other hand, have taken a more flexible stance
toward the understanding of the ḥ adīth, saying that the ḥ adīth men-
13
al-Kasāni, Badāiʾ al-Sanāiʾ, vol. 5, p. 157; Ibn ʿĀbidīn, Radd al-Muhtār, vol. 4,
p. 565. Al-Nawawī, al-Majmūʾ Sharh al-Muhazzab, vol. 9, p. 190.
tions three days in a figurative sense merely to convey the concept in

an illustrated manner. The actual duration of an option may thus be
determined by relating the option to the subject matter of sale. Thus,
the option period of three days may be deemed adequate for the sale
of cloth, for instance, but it may be extended to a month in the case
of buying a house.14
The third opinion is that of the Ḥ anbali school and the two disciples
of Abū Ḥ anīfah, namely Abū Youssuf and Muhammad Ibn al-Ḥ assan
al-Shaibānī. They held that the option may be for any length of time and
that is entirely a matter of agreement between the contracting parties
and there is no maximum permissible period.15
However, what still hinders for the development of new instruments
based on khiyār al-sharṭ is the claim that the legality of this khiyār is
endorsed by way of exception to the general principles and therefore,
it is not possible to make it the basis of an analogy. We have already
alluded to the deficiency and problematic nature of such assertion
inappropriateness of endorsing the legal maxim that what has been
accepted by way of exception to the general norms of qiyās could not
be the basis for another analogy in our discussion about the legality of
salam. However, some modern writers preferred the opinion that the
period of khiyār al-sharṭ should not exceed three days as it is stated in
the ḥ adīth because it has been legalized by way of exception and not
in line with the general principles. Therefore, it should not be used
as an alternative to the conventional options, which are generally for
one month to twelve months. Moreover, it is claimed that the period
of option in the conventional system is generally used for speculative
purposes and therefore, there is no need therefore, for it in the Islamic
financial system. Hence, the period of option should not exceed three
days and there is no need to change this rule, which has in any case
been validated by way of exception.16
However, it could be argued that to stick to the literal meaning of
the ḥ adīth without any effort to analyze its purpose is not the best
approach of genuine Islamic research especially in the area of muʿāmalāt
and when we are addressing new types of contracts unknown to early
Muslim jurists. Moreover, the majority of these scholars have opted
14
15
Ibn Qudāmah, al-Mughnī, vol. 3, p. 585; Ibn ʿĀbidīn, Radd al-Muhtār, vol. 4,
p. 565.
16
Samir Riḍwān, ʾAswāq al-Awrāq al-Māliyyah, p. 367.
226 chapter nine
for the extension of this period according to the commodity sold or

according to the need of the contracting parties as it is explained above.
It seems that there is a tendency among certain writers to judge any
new transaction, as illegal, as it is the best way of a valuable piece of
research or the only indication of the genuine Islamisity of a study and
the taqwā or God fearing of the writer. Moreover, in order to reach this
negative conclusion, no effort would is required made to analyze each
part of the problem separately but all the issues that could be and could
not be accommodated in Islamic law, and those which, are mixed in
order to give a negative impression. However, as it is rightly stated by
Sufyān al-Thawrī that “the genuine fiqh interpretation is that which is
done by a reliable jurist to prove the legality of an uneasy alternative
without contravening the principles of the sharīʿah while the strictness
(by prohibiting every thing) could be done by everyone”.17
Thus, the second opinion regarding the time period of khiyār al-sharṭ
and especially the third opinion are more in line with the objectives of
the sharīʿah and would be preferred by the present study since there
is no single piece of evidence which proves that the legality of khiyār
al-sharṭ is based on an exception.
Ownership of Commodity During the Period of Khiyār and

Libiality for Damage
The ownership of the commodity during the period of the option of

stipulation has given rise to difference of opinions among the different
schools of Islamic law. The major positions of these schools will be
briefly highlighted.
The Ḥ anafīs are of the opinion that if both parties, namely the buyer
and seller, hold the option, there would be no change in the owner-
ship of the countervalues and if the commodity is destroyed before
taking possession, the seller would be held liable. But if it is destroyed
after the buyer takes possession, the contract would be cancelled and
the buyer would be held liable and he is required to pay the value
of the destroyed commodity. However, if the buyer holds the option and
17
Qaraḍ āwī, Bayʿ al-Murābaḥ ah li al-ʾĀmir bi al-Shirāʾ Kamā Tujīh al-Maṣārīf
al-Islāmiyyah Dirāsah fi Dawʿ al-Nuṣūṣ wa al-Qawaʿid al-Shariyyah Maktabat Wahbah,
Cairo, 1987, p. 23.
the commodity is destroyed before taking possession, he would be held

liable to pay the price and not the value.18
The Mālikis, on the other hand, assert that the ownership of the
article of exchange does not shift during the option period irrespective
of who holds the option. The confirmation of the contract transfers the
ownership to the buyer. When the seller holds the option, and the buyer
takes possession of the article and subsequently claims loss of the com-
modity, the issue will be resolved by legal process. In principle, the seller
should be liable for all damages to the commodity during the period
of khiyār unless there is a case of negligence on the part of the buyer,
because the buyer before taking possession is considered as a trustee.
Thus if the buyer claims the loss of the commodity two situations may
arise: if it is possible to keep it safe without being destroyed such as in
the case of cloth or jewelery, he should bring evidence to substantiate
his claim of loss. Otherwise, he will be held liable.
On the other hand, if the commodity could not be kept secret as in
the case of animals and the buyer claimed its loss after taking possession
and some people give testimony contradicting his claim, then he will
be held liable. However, if there is no testimony as in the above case,
he should take an oath that he has not been negligent. If he refuses to
take the oath, he should be held liable. The Mālikis’ main argument is
that since the contract is not binding then it should not have effect and
the ownership of the commodity should remain with the seller.19
The Ḥ anbalis maintain that ownership of the commodity transfers to
the buyer during the option period irrespective of whether the option is
with the buyer or the seller or both. In case the commodity is destroyed
or suffers a diminution in value during the option period, the liability
of the buyer and seller depend on whether or not the commodity is
characterised by weight measurement or number. If it is of this kind
and the buyer has taken possession, he should be held liable in case of
destruction. But if he did not take possession, then, the seller would be
liable. However, if the commodity does not possess the above character-
istics, the buyer would be held liable whether he has taken possession
or not, except in the case where he wanted to take possession but has
18
See, al-Kāsāni, Badāiʿ al-Sanāiʿ, vol. 5, p. 264; Ibn al-Humām, Fatḥ al-Qadīr, vol. 5,
p. 504.
19
See, Ibn Rushd, Bidāyat al-Mujtahid, vol. 2, p. 211; al-Dasūqī, Sharḥ al-Dasūqī ʿalā
al-Sharh al-Kabīr, vol. 3, p. 103; Ibn Juzai, al-Qawānīn al-Fiqhiyyah, p. 264.
228 chapter nine
been prevented by the seller. In such a case, the buyer would be held
responsible.20
The Shāfiʿi have held that if the seller initiates the option, his owner-
ship of the commodity will continue. If the buyer retains the option,
the ownership of the commodity transfers to him because the contract
is binding from the seller’s side. And if both have stipulated the option,
the ownership of the commodity remains suspended during the time
of the option. If the commodity is destroyed before being transferred
by the seller to the buyer, the contract is considered annulled whether
the option is with the buyer, the seller or both. Similarly, if the destruc-
tion occurs after the buyer has taken possession, the contract would be
annulled if the seller holds the option.21
Although the opinion of some of the schools seems to be more com-
prehensible than the opinion of others with regard to the above issue, the
whole interpretation is based on ijtihād and not on clear text. Therefore,
it seems that the preference of any opinion, or of any school, will depend
on its practical flexibility and the consent of the parties concerned. This
wide range of opinions could also be a source of flexibility for those
willing to design new instruments based on khiyār al-sharṭ.
Managing Price Risk with Khiyār Al-Shart ̣
The importance of risk management in the present day business envi-

ronment is undeniable. A factor which significantly contributes to risk
is price volatility. Khiyār al-sharṭ could be used for managing business
risk and specifically price risk in the context of commodity markets.
As far as the financing of long-term assets, such as land, building
plant and machinery are concerned murābaḥ ah and ijārah seem to
be the most popular modes of financing with Islamic banks. Under
murābaḥ ah financing, the Islamic bank purchases an asset according to
the specification of its client from the supplier and resells it to his client
at a higher price, often on deferred basis. The process involves a risk
that is subsequent to purchase by the Islamic bank from the original
supplier; it may not be in the interest of the client any longer to buy
20
See, Ibn Qudāmah, al-Mughnī maʿ al-Sharḥ al-Kabīr, vol. 4, p. 219; al-Buhūti,
Kashshāf al-Qināʿ, vol. 3, p. 206; ʿAbd al-Rahmān al-Jizarī, al-Fiqh ʿalā al-Madhāhib
al-ʿArbaʿah, vol. 3, p. 171.
21
See, al-Nawawī, al-Majmūʿ, vol. 9, p. 214.
the same asset from the bank. Especially if the murābaḥ ah between the
bank and the customer is not binding.
It can be easily shown that management of the above risk is possible
through khiyār al-sharṭ. In this case, a simple alternative for the Islamic
bank would be to retain an option for itself at the time of purchase
from the original supplier. Subsequently, if the client buys the asset as
promised, the option would automatically expire and the earlier contract
becomes binding. However, if the client fails to honor its commitment,
the Islamic bank would be in a position to exercise its option and rescind
the purchase contract.
Thus, khiyār al-sharṭ enables the Islamic bank to shift the above risk
to its original supplier. It is also quite realistic that the Islamic bank
may have to forgo a part of its profit since the original supplier may
charge a high price in case of the sale with option as compared to sale
without option. This is legally and ethically justifiable since the original
supplier is now exposed to greater risk.22
Similarly, it is not difficult to see the usefulness of khiyār al-sharṭ
for managing risk in the financial market, such as the stock market
which is characterised by volatile prices. The economic rationale of the
conventional options is believed to be their potential use as a hedging
or risk management device. For instance, individual A plans to buy or
sell stock X after a time period of three months. He may be adversely
affected if the price moves up or down during this time period. The
risk due to price movement could be hedged by purchasing a call (put)
with a given exercise price of, say, $50. The price paid for the option;
say $5 is in the nature of insuring against adverse price fluctuations. At
the end of three months even if the price moves up to $60 (down to
$40), individual A is not affected since he can buy or sell at the exercise
price of $50. While this is true, the fact remains that this contract can
be used for speculation.
An alternative scenario can be achieved through khiyār al-sharṭ Indi-
vidual A can now enter into a purchase or sale contract and stipulate
a condition of option for himself for a period of three months. At the
end of the three months, if the price of stock X moves up or down, it
can confirm the contract of purchase or sale at the known contractual
22
See, Obaidullah, “Financial Engineering with Islamic Options”, Islamic Economic
Studies, vol. 6, no. 1, November 1998, pp. 90–91. Islamic Development Bank; Al-Ashqar,
“khiyār al-sharṭ”, p. 43.
230 chapter nine
price and thus be immune to price risk. However, if the price of stock X
moves down or up then individual A can rescind the contract and pur-
chase (sell) in the market, thereby not losing the profit potential. Thus,
khiyār al-sharṭ may benefit the party holding the option at the cost of
the counterparty. However, the disadvantage caused to the counterparty
can be compensated in the form of a higher contractual price and need
not be paid separately upfront to the counterparty. It is this feature that
provides an effective curb to speculation on price differences and thus,
differentiates Islamic options from conventional ones.23
Despite the fact that the above alternative could be considered as a
genuine Islamic way of risk management, to consider it immune from
price differential and, by consequence free from the possibility of being
used for speculation is not totally true. The individual, who is buying
stock, as it is mentioned in the above example, is looking at the up or
down trend of the stock he has bought or sold. He is neither looking to
avoid possible cheating in the price from his counterpart nor a possible
defect in the commodity or stock he bought or sold. At the same time,
he is not asking for an option because he has no sufficient knowledge
of the subject matter he has agreed to buy. He is buying these stocks
with a view of seeing if the later price is in his favor in which case he
will exercise the option in order to benefit from price differential and if
the opposite situation happens he will leave the option to expire with-
out exercising it. Yet, we are not arguing that since the use of khiyār
al-sharṭ as it is in the above example is not immune from being used
for price differential gain, therefore, it should be declared illegal. On
the contrary, we would like to say the issue of price differential should
not be used as ground to ban certain transactions. Otherwise even the
use of khiyār al-sharṭ here would be the center of controversy since it
is not free from the intention of gaining from price differentials.
In the case of ijārah financing too, some risk factors can be easily
avoided or shared with khiyār al-sharṭ. One common risk inherent in
ijārah financing is the risk of finding an alternative use of the asset, as
well as of locating a new client where the lease period is shorter than the
economic life of the asset. This is also the risk of the asset absolete and
the uncertainty about the realisation of salvage value in the absence of an
23
Obaidullah, “Financial Engineering with Islamic Options”, pp. 91–92.
active secondary market for the assets. This risk can be shared between
the Islamic bank and the lessee by providing an option to either or both
parties to confirm or rescind the contract after a certain period.
Although khiyār al-sharṭ even without any monetary compensation
in exchange for giving the right to cancel or confirm the contract, can
be a useful tool of risk management, some scholars have discussed the
possibility of charging a fee or premium for the option in khiyār al-sharṭ
so as to match the conventional option.
Kamālī has thus, maintained that the validity of charging a fee for
options is a matter that falls under the general subject of contractual
stipulation, a subject that invoked different responses from the schools
of Islamic law notwithstanding the affirmative nature of the source of
evidence on it. In principle, the contractual stipulation by the parties
should not be allowed to circumvent and override the given mandate
of the sharīʿah in contract. In other words, the parties are not at total
liberty to stipulate what they please. The liberty given by the general
theory of freedom of contract in Islamic law is subject to the condition
that stipulation should not overrule the clear injunctions of Islamic
law. Provided that this limitation is observed, there is in principle no
restriction on the nature and types of stipulations that the parties may
wish to insert into a contract.
According to Ḥ anafīs and Shāfis’ point of view stipulations are valid
when they are in line with the essence of the contract. Thus, a condition
to provide a guarantor or a surety in the form of mortgage or pawn is
legal provided that both parties agree upon it. The Mālikis are even more
explicit in validating stipulations having financial value, as for example
a buyer’s stipulation for transporting the goods to a certain locality. The
Ḥ anbalis are the most liberal. They maintain that stipulations which
fulfill a legitimate objective and realise a benefit and convenience, or
which may help to remove hardship and facilitate the easy flow of com-
mercial transactions are generally valid as a matter of principle.24
Thus, after elaborating on the opinion of the different schools on
the liberty of the parties involved in a contract to insert the conditions
they wish, Kamālī concluded that this analysis is not only affirmative
of the parties’ freedom to insert stipulations in contracts but also that
compensation or a fee may be asked by one who grants an option or
24
For more details, see Kamālī, Islamic Commercial Law: An Analysis of Futures and
Options, pp. 352–356.
232 chapter nine
privilege to the other. If the seller is entitled to stipulate a security

deposit or pawn, then, it is a mere extension of the same logic that he
may charge the buyer and impose a fee for compensation in respect of
such options and stipulations that are to the latter’s advantage. When
the buyer, for example, stipulates that he will ratify or revoke the con-
tract within a week or a month, this may well prove to be costly to the
seller and he may, therefore, charge a fee/compensation for granting
the option. We thus conclude that options may carry a premium and
there should basically be no objection to this.25
A similar approach has been taken by other Muslim jurists, such
as, Shaḥ ḥāt al-Jundi, Yousuf Sulaimān and ʿAli ʿAbd al-Qādir. Yousuf
Sulaimān, for instance, concluded: “the money taken by the seller as
premium could not be returned to the buyer (if he fails to ratify the
contract within the agreed period) because Allāh says, “Oh you who
believe fulfill your obligations”.26 In addition according to the reported
ḥ adīth of the Prophet “Ṣulḥ among Muslim is permissible unless it
transforms what is ḥ alāl into ḥ arām or what is ḥ arām into ḥ alāl and,
Muslims are bound by their stipulations unless it be a stipulation, which
declares unlawful what is permissible or permits what is unlawful”.27
Since the second party has the same right, then he could sell it as well
given that the time period of the option is determined. On the other
hand, it is possible that one of the parties donated the premium to the
other as a gift.28 Similarly, ʿAli ʿAbd al-Qādir29 and Shaḥḥāt al-Jundī30
endorsed the above opinion.
In contrast, Ahmad Muḥyī al-Dīn and Samīr Ridwān have taken a
negative position and totally opposed any adoption of conventional
options through khiyār al-sharṭ. One of their main arguments is that
khiyār al-sharṭ or the option of stipulation is anomalous to norms and
principle of Islamic law. It is merely tolerated by way of exception. It is
not allowed to give an opportunity to look if the price movement is in
25
Ibid., pp. 356–357.
26
Al-Māʾidah (5/1).
27
Al-Bukhārī, Saḥ īḥ al-Bukhārī with Fatḥ al-Bārī, Book of conditions (Shurūt ̣), v. 5,
p. 354.
28
See, Youssuf Sulaimān, “Raiʾ al-Tashrīʾ al-Islāmī fi Masāʾil al-Burṣah”, al-Mawsūʿah
al-ʿIlmiyyah wa al-ʿAmaliyyah lil bunūk al-Islāmiyyah, vol. 5, p. 425.
29
See, “Taʾqīb ʿalā Raiʾ al-Tashrīʾ al-Islāmī fi Masāʾil al-Burṣa h”, al-Mawsūʿah
al-ʿIlmiyyah wa al-ʿAmaliyyah lil bunūk al-Islāmiyyah, vol. 5, p. 441.
30
See, Muʿamalāt al-Burṣah, p. 151.
one’s favor.31 We have already demonstrated the weakness of this argu-

ment while mentioning the legality of salam. Similarly, Ibn Taymiyyah
and Ibn Qayyim vigorously refuted this claim with khiyār al-sharṭ and
maintained that it is allowed as a matter of principle and not against
the norms or qiyās. Yet, it could be argued that it is wise to prefer the
opinion of the majority rather than to follow the opinion of a few
scholars. However, such an argument will not emanate from a person
who has little knowledge about Islamic law. What should be followed
is the strength of evidence advanced and the spirit and objectives of
the sharīʿah.
Moreover, the Ḥ anafīs themselves have departed from the principles
that they have established with regard to this theory in general and
about khiyār al-sharṭ in particular by legalising khiyār al-naqd by way
of analogy to khiyār al-sharṭ. Yet, if khiyār al-sharṭ is allowed by way
of exception as it is claimed and, if the alleged theory, that, what has
been allowed by way of exception should not be the basis of analogy
(ma thabata ʿalā khilāf al-qiyās la yuqāsu ʿalaihi), is true, then khiyār
al-naqd should be declared illegal in the Ḥ anafī school. But this was
not the case. Thus, we do believe that khiyār al-sharṭ is in line with the
norms of qiyās and it is legal to base an analogy on it.
On the other hand, the critics objected to option on the grounds that
it is an unfair transaction and works for the advantage of one party to
the total detriment of the other, and therefore, it is a kind of oppres-
sion and injustice.32
Refuting this argument, Kamālī said:
This analysis is somewhat unfounded and superfluous as it is based on
wrong foundation. For one thing, it should be obvious that the option
holder does not always make profits, as Ḥ assan tends to suggest, but may
make a loss and lose his premium as a result. It is not as if the option
holder has locked himself in a no lose situation and Ḥ assan has not
acknowledged this. The other point is that the option holder may well be
acting as a hedger who wishes to protect himself against exorbitant losses
and buying options merely tries to minimize the prospect of a bigger loss.
And then the issue of oppression and injustice is rather an exaggeration
simply because the parties enter an agreement and the option buyer pays
for the advantage he is granted. The price that he pays is also determined
31
Ahmad Muḥyī al-Dīn Ḥ assan, ʿAmal Sharikāt al-Istithmār, pp. 268–271; Samīr
Riḍwān, Sūq al-ʿAwrāq al-Māliyyah, p. 361.
32
Ahmad Muḥyī al-Dīn Ḥ assan, ʿAmal Sharikāt al-Istithmār, pp. 268–271; Samīr
Riḍwān, Sūq al-ʿAwrāq al-Māliyyah, p. 361.
234 chapter nine
not by him or his agent, but by the exchange authorities and the question
of manipulation and unfair advantage is basically not relevant.33
So, it is clear that khiyār al-sharṭ could serve as a tool of risk management
and fulfill some of the benefits associated with conventional options.
Moreover, if we consider the possibility of charging a fee for giving the
option, the benefits of khiyār al-sharṭ, as a tool of risk management,
may be parallel to those of conventional options.
However, some have objected to such a proposition on the grounds
that the subject matter in such a transaction will be a pure right, which
is not eligible to be the subject matter of a contract. However, the pres-
ent study will elaborate on the issue and critically analyze the different
opinions in a separate chapter.
Khiyār Al-Naqd
It is the right of either of the parties to confirm the contract or to can-

cel it by means of the payment of the price. In other words, it is the
conclusion of a contract with the option that the payment of the price,
within a specific period, would confirm the contract while a failure to
do so would get cancelled.34
Given the fact that the seller or the buyer can stipulate khiyār al-naqd
and the legality of the two contracts namely khiyār al-sharṭ and khiyār
al-naqd is discussed separately in the classical jurists works, it is worth-
while to discuss the two contracts separately here as well. Thus, first case
the seller say to the buyer, “I am selling to you this commodity on the
condition that if you do not pay me the price within a specific period
of time (one month for instance), there is no sale”.35 In second case
the seller says to the buyer after receiving the price, “I sell to you this
item on the condition that if I return to you the price within a specific
period (one month for instance), there is no sale between us.36 The first
case is very similar to khiyār al-sharṭ while the second is a variation of
33
Kamālī, Islamic Commercial Law: An Analysis of Futures and Options, p. 360.
34
See al-Dur al-Mukhtār Sharh Tanwīr al-Abṣār, vol. 4, p. 571; ʿAbū Ghuddah,
al-Khiyār waʾAtharuhu fi al-ʿUqūd, p. 43.
35
al-Zailaʿī, Tabyīn al-Ḥ aqāʾiq sharh Kanz al Ḥ aqāʾiq, Dār al-Maʿrifah, Beirut, vol. 4,
p. 15.
36
Ibn ʿĀbidīn, Rad al-Muḥ tārʿ alā al-Dur al-Mukhtār, Dār al-Fikr, Beirut, 1979,
vol. 4, p. 567.
bayʿ al-wafāʾ. Therefore, the legality of the first case is generally agreed
upon while Muslim jurists, depending on their admission or rejection
of bayʿ al-wafāʾ, disputed the legality of the second.
Although the first case is very similar to khiyār al-sharṭ, its admission
by way of analogy to khiyār al-sharṭ is another evidence that the validity
of khiyār al-sharṭ is in line with the norms of qiyās and therefore, any
analogy to khiyār al-sharṭ is permissible. Moreover, this ijtihād by the
Ḥ anafīs may constitute a precedent for those involved in Islamic com-
mercial law to design any contract based on analogy to khiyār al-sharṭ,
provided it could achieve something in the process of designing new
instruments.
The possible use of khiyār al-naqd as a means of risk management as
it is discussed in the first case is almost similar to that of khiyār al-sharṭ.
Thus, some of the contemporary studies, which have discussed khiyār
al-naqd advanced almost the same practical cases as the ones discussed
in khiyār al-sharṭ.37
The second aspect of khiyār al-naqd is a form of bayʿ al-wafāʾ. It is
when the seller says to the buyer “I will sell you this item on the condi-
tion that whenever I return to you the money that you have paid, you
have to return to me my item”. This kind of sale has been the source
of disagreement between Muslim scholars. The Mālikīs, Shāf ʿīs and
Ḥ anbalīs consider it as an illegal contract because it will be a kind of a
loan given in return for a specific benefit (qarḍan Jarra naf ʿan), which
is forbidden, while the Ḥ anafīs allowed it.
Thus, if we uphold the Ḥ anafīs’ position in the second case of khiyār
al-naqd, the practical aspect might be represented by the following sce-
nario: an Islamic financial institution is interested in a specific project
but it has not yet conducted the necessary studies about it and it did not
want to lose the opportunity. In this case, it could enter a contract on
the condition that whenever it returned the money that it had received,
there will be no deal.38
37
Abd al-Sattar Abū Ghuddah, “Khiyār al-Naqad wa Tatḅ iqātuhu fi Muʿāmalāt
al-Maṣārif al-Islāmiyyah” ʿAmāl al-Nadwah al-Fiqhiyyah al-Thāniyah, Bayt al-Tamwīl
al-Kuwaitī, Kuwait, 1993, pp. 186–188; Muhammad Shibbir, “Khiyār al-Naqd wa
Tatḅ iqātuhu fi Muʿāmalāt al Maṣārif al-Islāmiyyah” ʿAmāl al-Nadwah al-Fiqhiyyah
al-Thāniyah, Bayt al-Tamwīl al-Kuwaitī, Kuwait, 1993, pp. 222–225.
38
See Khālīd ʿAbd Allāh Shuʾaib, “Khiyār al-Naqaḍ wa Tatḅ iqātuhu fi Muʿāmalāt
al-Maṣārif al-Islāmiyyah” ʿAmāl al-Nadwāh al-Fiqhiyyah al-Thāniyah, Bayt al-Tamwīl
al-Kuwaitī, Kuwait, 1993, p. 244.
236 chapter nine
However, it should be noted in this case that if the beneficiary of

khiyār al-naqd is just taking the amount or the price in order to benefit
from it and then returning it to the buyer and recollecting his com-
modity in a tricky manner (ḥ ilah), it will be a real case of qarḍan Jarra
naf ʿan and therefore, the possibility is great of a ribā transaction.
CHAPTER TEN
ʿARBŪN RISK MANAGEMENT AND OPTIONS
ʿArbūn refers to a sale in which the buyer deposits earnest money with
the seller as part payment of the price in advance, but agrees that if he
fails to ratify the contract, he will forfeit the deposit money, which the
seller can keep”.1 It is also defined as “a transaction whereby the buyer
pays only a small part of the price of a commodity (for instance two
dirhams), on the understanding that the seller will retain this amount
if the sale is not finally concluded due to withdrawal of the buyer”.2
However, Imām Mālik gives a somewhat more general definition
of ʿarbūn. It holds when a person buys or rents an animal and says to
the seller or the owner of the animal, “I will give you one dīnār or one
dirham or more or less and if I ratify the sale or the rent contract, the
amount I gave will be part of the total price. And if I cancel the deal,
then what I gave will be for you without any exchange”.3 The above
definition of Imam Mālik shows that ʿarbūn is not only possible in a
sale contract but also in a rent or leasing contract. This will widen the
use of ʿarbūn as we will see later. However, there is disagreement among
the classical schools of Islamic law about the legality of ʿarbūn.
The Majority4 held that it is an invalid contract and considered it
to be akin to misappropriating the property of others. Moreover, it
involves an unknown option or condition, which amounts to gharar.
The Ḥ anbalī school, on the other hand, considers it as a legal contract.
ʿUmar, the second caliph, and his son ʿAbd Allāh Ibn ʿUmar held a simi-
lar position. Among the followers certain prominent figures including
Mujāḥīd, Saʿīd Ibn al-Musayyib, Ibn Sīrīn, Nāfiʿ Ibn al-Ḥ ārith, and Zaid
1
Kamali, Islamic Commercial Law an Analysis of Options and Futures, p. 365.
2
Mohammad Ali El-Gārī, “Toward An Islamic Stock Market”, Islamic Economic
Studies, vol. 1 no. 1 December 1993, p. 14.
3
Al-Bājī al-Muntaqā Sharḥ al-Muwataʾ, vol. 4, p. 158.
4
See for instance, Ibn Rushd, Bidāyat al Mujtahid, vol. 2, p. 161. Al-Dirdīr, al-Sharḥ
al-Kabīr, vol. 3, p. 63; Al-Nawawī, Mugnī al-Muhtāj, vol. 2, p. 39; Ibn Qudāmā,
al-Mughnī, vol. 4, p. 224.
238 chapter ten
Ibn ʾAslam also held it to be lawful.5 The source of this difference lies
in the authenticity of two aḥ ādīth reported on the issue, which seem
to contradict each other.
Thus, the majority relied on a ḥ adīth reported by Imām Mālik in
al-Muwaṭtạ ʾ as well as by Imām Aḥmad, Nasāʾī, Abū Dawūd and Ibn
Mājāh to the effect that the Prophet (PBUH) prohibited the sale of
ʿarbūn. However, the ḥ adīth is considered to be weak (munqaṭiʿ).6
On the other hand, the Ḥ anbalī School relied on a ḥ adīth reported
by ʿAbd al-Razzāk to the effect that the Prophet was asked about ʿarbūn
sale and he declared it permissible. But this ḥ adīth is also declared to
be weak (mursāl).7 In addition, the Ḥ anbalīs relied on the report of
Nāfi’s Ibn al-Ḥ ārīth, the officer of the caliph ʿUmar in Makkah to the
effect that he bought from Safwān Ibn Umayyah a prison house for the
caliph ʿUmar for four thousand dirham on condition that if the caliph
approved of it, the deal would be final, otherwise Safwān would be
given four hundred dirhams.8
Further evidence could be invoked in support of the legality of bayʿ
al-ʿarbūn such as the ḥ adīth: “Muslims are bound by their stipulations
unless it be a stipulation which declares unlawful what is permissible
or permits what is unlawful”.9
Also it is reported in al-Bukhārī and narrated by Ibn Sirīn that “a
man said to a hirer of animals, ‘prepare your travelling animals and if I
do not go with you on such and such a day, I shall pay you a hundred
dirhams’. But he did not go on that day. Shuraiḥ said: If anyone puts a
condition on himself of his own free will without being under duress,
he has to abide by it. Also it is narrated by Ayyūb from Ibn Sīrīn that
“A man sold food, and the buyer told the seller that if he did not come
to him on Wednesday, his deal would be cancelled, and he did not
turn up on that day”. Shuraiḥ said to the buyer “You have broken your
promise” and gave the verdict against him. Ibn Ḥ ajar said, Sayid Ibn
Manṣūr has completed this transmission by the chain of Sufyān from
5
See, for instance, Ibn Qudāmā, al-Mughnī, vol. 4, p. 234; al-Qurtụ bi, Ahkām
al-Qurʾān, vol. 5, p. 150 and Ibn Qayyim, ʿIlām al-Muwaqqiʿīn ʿan Rab al-ʿĀlamīn,
vol. 3, p. 389.
6
See, for instance Ibn Ḥ ajar, Talkhīs al-Ḥ abīr, vol. 3, p. 17; al-Sanʿāni, Subul al-Salām,
vol. 3, p. 17 and al-Shawkāni, Nayl al-Awṭār, vol. 5, p. 153.
7
See al-Shawkānī, Nayl al-Awṭār, vol. 5, p. 153.
8
Ibn Qayyim, ʿIlām al-Muwaqqiʿīn ʿan Rab al-ʿĀlamīn, vol. 3, p. 389.
9
Al-Bukhārī, Saḥ īḥ al-Bukhārī with Fatḥ al-Bārī, Book of conditions (Shurūt)̣ , v. 5,
p. 354.
ʿARBŪN risk management and options 239
Ayyūb. The conclusion from this ḥ adīth is that Shuriaḥ in both cases had
given the verdict against the person who makes the condition against
himself without duress.10
A number of contemporary Muslim jurists have opted for the admis-
sion of ʿarbūn. Thus, al-Qaraḍāwī, in his analysis and comparison of the
evidence for and against the sale of ʿarbūn, stated that the opponents
of ʿarbūn have relied on a ḥ adīth and the argument that it is premised
on a condition, which entails appropriation by the seller of the buyer’s
property without any exchange. As for the ḥ adīth, it is unreliable. But
since the ḥ adīth upon which the proponents of bayʿ al-ʿarbūn rely is
also weak, al-Qaraḍāwī observes that the issue should consequently be
determined on rational grounds and here we note that Imam Ahmad
relied on the precedent of Umar Ibn al-Khat ̣ṭab and has considered
ʿarbūn to fall into the category of lawful appropriation. This ruling,
al-Qaraḍāwī adds, is more suitable to our own time and is in greater
harmony with the spirit of the sharīʿah, which seeks to remove hardship
and facilitate convenience for the people.11
Meanwhile, al-Zuhaili rejected al-Shawkānī’s argument that since the
two ḥ adīths contradict each other in that one prohibits ʿarbūn while
the other legalizes it, we should opt for the prohibition because, as
it is well known in Islamic jurisprudence, if there are two conflicting
commands on prohibition and permissibility, the prohibition should be
given priority.12 Al-Zuhailī said the evidence of the two parties, in this
case, is not equal. The proponents relied on the precedent of ʿUmar Ibn
al-Khat ̣ṭāb which could be considered as an ijmāʿ, because he was not
opposed by any of the companions.
Muṣtafā al-Zarqā highlighted the utility of ʿarbūn in modern com-
merce and the support it has received in general custom and legislation.
ʿArbūn provides a useful formula, which can be utilized to facilitate a
credible commitment, or a surety that the buyer will not change his
mind after finalising a sale. However, if he does so the seller can be
compensated for possible loss that has been caused as a result. The need
for such assurance is more evident in modern times when large orders
have to be entertained by making elaborate preparations involving a
chain of other subsidiary transactions that incur additional expenditure.
10
Ibid.
11
Al-Qaradāwī, Sharīʿat al-Islām, p. 114.
12
al-Shawkānī, Nayl al-Awṭār, vol. 5, p. 153.
240 chapter ten
It is likely that the seller who holds his goods or manufactures them
for the purpose, and waits until the buyer ratifies the sale may lose the
opportunity of selling his goods or may fail to sell them for a good
price, in which case he should be entitled to compensation, and ʿarbūn
responds to this need.13
ʿAbd Allāh Ibn Manīʿ, in his rejection of the opponents’ argument
that there is gharar in ʿarbūn14 since in such a contract there is no time
limit for the exercise of the right of cancellation of the contract said,
“We agree that there should be a time limit for the exercise of this
right, otherwise the possibility of gharar may have some grounds”.15
Yet, it should be noted that some sources of the Ḥ anbalī School did
not mention a time frame for the exercise of this right. But ʿAbd Allāh
al-Bassām argues that the Ḥ anbalīs, as a matter of principle, reject all
conditions of unlimited time in a contract, therefore, even if sometimes,
some Ḥ anbalī scholars did not mention explicitly this limitation in
their works, they are considering it. Moreover, some other Ḥ anbalī’s
scholars such as al-Maqdisī16 have mentioned it. Besides, it could be
argued that the issue of time limitation in this case is similar to that
of khiyār al-sharṭ.17 Some other contemporary scholars, such as Mājid
Abū Ruqayyah18 and Lāshīn Mohammad al-Qayyātī19 have also opted
for the legality of ʿarbūn.
Considering the fact that some contemporary scholars have opposed
bayʿ al-ʿarbūn on this ground, namely there is gharar in ʿarbūn since
in such a contract there is no time limit for the exercise of the right of
cancellation of the contract, the participants in the Islamic Fiqh Acad-
emy discussion on ʿarbūn opted for the inclusion of this condition in
13
Quoted by Kamālī, Islamic Commercial Law an Analysis of Options and Futures,
pp. 367–8.
14
For more elaboration on the existence of gharar in bayʿ al-ʿarbūn see, Ṣiddīq
al-Ḍ arīr, “Bayʿ al-ʿArbūn”, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 8, vol. 1, 1994, pp.
647–669.
15
ʿAbd Allāh Ibn Manīʿ, “Baḥ t h fi Ḥ ukm Bayʿ al-ʿArbūn”, Majallat al-Buḥ ūth
al-Islāmiyyah, Riyadh Saudi Arabia, p. 170.
16
Al-Maqdīsī, Ghāyāt al-Muntahā, al-Maktab al-Islāmī, Damascus, 1961, vol. 2,
p. 26.
17
ʿAbd Allāh al-Bassām, Majallat Majmaʿ al-Fiqh al-Islāmī (discussion about bayʿ
al-ʿarbūn) no. 8, vol. 1, 1994, p. 766.
18
Mājid Abū Ruqayyah “Ḥ ukm bayʿ al-ʿarbūn, fi al-Islām”, Buḥūth Fiqhiyyah fi Qaḍāyā
Iqtiṣādiyyah Muʿāṣirah, pp. 393–415.
19
Lāshīn Mohammad al-Qayyātị̄ , “Bayʿ al-ʿarbūn,” Majallat al-sharīʿah wa al-Dirāṣāt
al-Islāmiyyah, no. 26, 1995, pp. 111–154.
every ʿarbūn contract in order to solve the problem.20 It is worth noting

that the opponents of ʿarbūn have objected to it also on other grounds.
Al-Ḍ arīr, for instance, opposed ʿarbūn also on the grounds that it has
connotations of a conventional option and it may be used for specula-
tive purposes.21
On the other hand, it should be noted that the legislation of several
Arab countries has opted for the legality of ʿarbūn as an indication that
both parties in the contract have the right to cancel the contract dur-
ing the agreed period except for the civil law of Iraq, which considers
ʿarbūn as an indication that the contract is final and conclusive. Thus,
Article 103 of the Egyptian civil code, Article 74 of the Kuwaiti civil
code, article 103 of the Jordanian civil code And 104 of the Syrian civil
code state that ʿarbūn is an indication that both parties have the right
to cancel the contract during the agreed period.22
The Legal Status of Bayʿ Al-ʿArbūn
It may be asked whether ʿarbūn is a kind of clause for liquidated dam-

ages or a kind of penalty, which will be imposed upon the one who
fails to honor his obligation as a compensation of imminent harm, or
is it something else? If we consider ʿarbūn as a kind of clause for liqui-
dated damages, this would mean that the damage should be assessed
by a court of law even if the parties have agreed at the beginning to a
certain amount of compensation. If what is agreed upon between the
parties is more than the real damage, the court would reduce it to the
appropriate amount of the real damage and if it is less, then, the one
who fails to honor his obligation should be obliged by the court to
pay more. This is totally different from the nature of ʿarbūn, which is
an exchange of the “right” to cancel the contract as it is agreed upon
20
ʿAbd al-Razzāq al-Sanhūrī, Masādir al-Ḥ aqq, vol. 2, p. 101. al-Zuhailī, “Bayʿ
al-ʿArbūn”, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 8, vol. 1, 1994, p. 698. Rafiq al-Miṣrī,
“Bayʿ al-ʿArbūn”, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 8, vol. 1, 1994, p. 729; al-
Qaraḍāwī, Majallat Majmaʿ al-Fiqh al-Islāmī (discussion about bayʿ al-ʿarbūn) no. 8,
vol. 1, 1994, p. 769.
21
Majallat Majmaʿ al-Fiqh al-Islāmī (discussion about-ʿarbūn), p. 756.
22
See, ʿAbd al-Majīd al-Ḥ akīm, al-Kāfī fi Sharḥ al-Qānūn al-Madanī al-Urdinī
wa al-Qānūn al-Madanī Irāqī wa al-Qānūn al-Madanī al-Yamanī fi al-Iltizāmāt
al-Shakhṣiyyah, pp. 264–274; al-Waṣīt Sharḥ al-Qānūn al-Madanī al-Urdinī, al-Dār
al-ʿArabiyyah li al Mawsūʿāt, vol. 2, pp. 134–141.
242 chapter ten
between the parties, and cannot be subjected to the court’s interven-

tion. Moreover, in the case of liquidated damages, the occurrence of
the damage is a condition for receiving the compensation. If no damage
has happened, then, there are no grounds for compensation and this is
not the case with ʿarbūn where the beneficiary is entitled to it whether
there is damage or not.
Similarly, if we consider ʿarbūn as a penalty to compensate against the
harm suffered by the owner of the commodity because he has reserved
his commodity for the buyer and waited for him to ratify the contract
or he may have lost the opportunity of selling his item at a good price,
a court intervention is necessary to assess the damage. However, this is
not in line with the spirit of ʿarbūn where the parties have agreed and
fixed the amount just for the “right” to cancel the contract.23 Therefore,
it could be concluded that what is paid as ʿarbūn is in exchange for the
right to cancel the contract and not compensation for the damage.
ʿArbūn in Currency Exchange or ṣarf
As explained before, one of the requirements of legal currency exchange

is that the taking of possession should be on the spot and hand to hand.
Based on this principle it could be deduced that it is not possible to use
ʿarbūn in currency exchange. This is because ʿarbūn means the deferment
of taking possession, which will result consequently in ribā al-nasīaʾ.
Thus, it seems that there is a general agreement among contemporary
Muslim jurists that ʿarbūn is illegal in currency exchange.24
ʿArbūn in Commodities and Services
It is clear from Imam Malik’s definition of ʿarbūn mentioned above

that it is practicable in bayʿ and ijārah. Therefore, it could be said that
23
See for instance, ʿAbd al-Razzāq al-Sanhūrī, Maṣādir al-Ḥ aq, pp. 89–103; al-Sanhūrī,
al-Wasīt, vol. 4, p. 90; ʿAbd Allāh Ibn Maniʿ, “Bahth fi Ḥ ukm Bayʿ al-ʿArbūn”, pp.
173–175; Rafiq al-Maṣrī, “Bayʿ al-ʿArbūn”, pp. 726–729.
24
See for instance, al-Zhaili, “Bayʿ al-ʿArbūn”, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 8,
vol. 1, 1994, p. 699; Rafiq al-Maṣrī, “Bayʿ al-ʿArbūn”, Majallat Majmaʿ al-Fiqh al-Islāmī,
no. 8, vol. 1, 1994, p. 731; Ṣiddīq al-Ḍ arīr, “Bayʿ al-ʿArbūn”, Majallat Majmaʿ al-Fiqh
al-Islāmī, 1994, no. 8, vol. 1, p. 705; Abd ʿAllāh Ibn Manīʿ, “Baḥth fi Ḥ ukm Bayʿ al-
ʿArbūn”, Majallat al-Buhūth al-Islāmīyyah, Riyadh, Saudi Arabia, pp. 177–178.
ʿarbūn is legal with regard to commodities and services. Sale in Imām

Mālik’s definition is an example of the sale of commodities while ijārah
is an example of services.25
To give an example of ʿarbūn in commodities, we may choose the
example given at the beginning of our discussion on options regarding
the purchase of a car. Although the above example has been given as
a kind of option it could also be an example of ʿarbūn, especially in its
early stage because the two cases are the same except for one minor
difference. Thus, as it is explained above you have decided that you
want to buy a new car. You select the type of the car you want and go
to your local dealer. At the dealer’s showroom, you decide on the exact
specifications of your car’s colour, engine, size, wheel trim etc. The
car is on offer at £20,000, but you must buy the car today. You do not
have that amount of cash available and it will take a week to organize
a loan. You offer the dealer £100 if he will just keep the car for a week
as ʿarbūn (which is in the above example an option). At the end of the
week, if you buy the car, the £100 will be part of the price while if you
do not turn up, the £100 will be for the seller (however, in the above
example the £100 is his whether or not you buy the car). This is the
only difference between the two cases. Thus, you have entered into an
ʿarbūn in the present example while it is a call option contract in the
earlier example.
If, during the week, you discover a second dealer offering an identical
model for £19,500, you will not take up your option with the first dealer.
The total cost of buying the car is £19,500+ £100 = £19,600, which is
cheaper than the first price you were offered. However, if you find that
the first dealer’s price is lower than the second dealer’s, for instance, and
buy the car from the first dealer, the car will cost a total of £20,100. If
you decide not to buy the car at all, you will lose your £100 to the car
dealer. Thus, you are hedging against a price rise in the car.
To give an example of ʿarbūn in ijārah, the following example may be
considered. Suppose the ḥaj season is approaching and the different ḥaj
management agencies are looking for the best means of transportation
for their clients which is at the same time beneficial for their business
activities. Suppose, Malaysian Airline is the first airline company to offer
a special airfare for the occasion and suppose it is RM 2500 per ticket.
25
Also see, ʿAbd Allāh Ibn Manīʿ,“Baḥth fi Ḥ ukm Bayʿ al-ʿArbūn”, pp. 178–9;
al-Zuhailī, “Bayʿ al-ʿArbūn”, 700; Rafīq al-Miṣrī, “Bayʿ al-ʿArbūn”, p. 732.
244 chapter ten
Immediately, Tabung Ḥ aji as a ḥaj management company approaches

Malaysian Airlines so as to conclude a deal for the transportation of its
10,000 pilgrims this year. Given the fact that Malaysian Airlines’ offer is
limited, other ḥaj agencies may also compete to get it. And at the same
time, Tabung Ḥ aji is hoping that other airline companies may also offer
such a special airfare, considering the fact that, some airline companies,
at normal times, have cheaper fares than Malaysian Airlines. However,
a special airfare from these companies is just a possibility. Therefore,
Tabung Ḥ aji decides to enter into an ijārah with ʿarbūn with Malaysian
Airlines for the transportation of its customers to the Holy Land. Thus,
Tabung Ḥ aji pays as ʿarbūn RM 200 for every air ticket. The ʿarbūn
time period is 45 days. Twenty days after the signing of this contract,
another airline company offers a much better deal. Suppose that it is
just RM 2000 per ticket. Tabung Ḥ aji seizes the opportunity and con-
cludes a deal with the new company while losing its ʿarbūn given to
Malaysian Airlines. Thus, rather paying RM 2500 per ticket Tabung Ḥ aji
is now paying just RM 2000 + the RM 200, which it has forfeited to
Malaysian Airlines. However, if the contrary situation happens and no
other airline has offered a cheaper airfare, but rather higher than that
of Malaysia Airlines, then, Tabung Ḥ aji will finalise its contract with
Malaysian Airline on the previous terms of the contract. Thus, Tabung
Ḥ aji has been able to manage its risk of getting the best service for the
transportation of its customers to the Holy Land.
ʿArbūn in Shares Trading
Considering the fact that shares trading is accepted as legal by almost

all contemporary Muslim jurists and bearing in mind that ʿarbūn is legal
in any sale which could be deferred in Islamic law, therefore, ʿarbūn in
share trading is legal.26 Needless to mention that this rule is limited to
shares of companies dealing in permissible or ḥ alāl products and which
are not involved in ribā or gambling.
To illustrate the above situation, suppose an investor has completed a
study to invest in a specific project but the work in the new project will
not start until the coming month. Therefore, he decides to invest in the
26
See al-Zuhaili, “Bayʿ al-ʿArbūn”, p. 700; Rafiq al-Miṣrī, “Bayʿ al-ʿArbūn”, p. 733;
ʿAbd Allāh Ibn Manīʿ, “Baḥth fi Ḥ ukm Bayʿ al-ʿArbūn”, pp. 179–180.
stock market by buying shares from a very sound company in the hope
that the share prices of the company will go up in the coming days,
then he will be able to sell these shares in the spot market in order to
gain some profit before starting to finance his initial project. However,
due to the volatile nature of shares trading, there is a possibility that
the prices may go down as well. Therefore, he decides to buy the shares
through ʿarbūn. Thus, if his expectations are fulfillled, he will sell the
shares and make some profit. However, if his expectations are proven
to be wrong, his loss will be limited to only the amount paid as ʿarbūn
while the financing of his original project will not be affected.
ʿArbūn in Murābaḥah
Murābaḥ ah is generally defined as selling a commodity with cost plus

a margin. Murābaḥ ah in this sense is an ordinary kind of sale and
therefore, ʿarbūn is legal. However, if we mean by murābaḥ ah what
is practiced by Islamic banks nowadays or al-murābaḥ ah lilʾāmir bi
al-shirāʾ, the arrangement between the bank and the customer is just a
promise and not a real contract while the agreement between the bank
and the real owner of the commodity is a contract. Such a deal involves
a promise to buy/sell, which implies deferment. Hence, it cannot coexist
with ʿarbūn. Therefore, ʿarbūn in such murābaḥ ah will be illegal if we
consider the promise as not binding.27
However, if the promise between the bank and the customer is con-
sidered as binding as it is the prevailing practice of Islamic financial
institutions backed by the decision of the Islamic Fiqh Academy, the pos-
sibility of ʿarbūn in murābaḥ ah lilʾāmir bi al-shirāʾ may be considered.
Addressing the issue, Ibn Manīʿ said:
Considering the fact that ʿarbūn is possible only in a contract as a part of
the whole price, then there are no grounds to legalize ʿarbūn in murābaḥ ah
lil ʾāmir bi al-shirāʾ because the agreement between the bank and the cus-
tomer is just a promise. However, this does not mean it is illegal for the
promisor to give the promisee a certain amount of money in exchange for
the fulfillment of his promise. However, this could not be considered as
ʿarbūn but it could be a stipulation of liquidated damages and it is up to
the parties’ agreement. In other words it is up to what the parties agreed
27
al-Zuhaili, “Bayʿ al-ʿArbūn”, p. 701; ʿAbd Allāh Ibn Manīʿ, “Baḥth fi Ḥ ukm Bayʿ
al-ʿArbūn”, p. 180; Rafīq al-Maṣrī, “Bayʿ al-ʿArbūn”, pp. 734–5.
246 chapter ten
upon whether to consider it as a part of the whole price or not because

Muslims are bound by their stipulations.28
A close attention at this statement reveals that despite Ibn Manī’s refusal
to call it ʿarbūn, it seems that there is no genuine difference between the
two. Going one step further, Tariqullah Khān suggested an example of
an ʿarbūn in murābaḥ ah lilʾāmir bi al-shirāʾ the legality of which some-
how needs to be legally evaluated considering the fact that this kind of
murābaḥ ah constitutes about 75% of all transactions of Islamic banks.
To clarify his suggestion, Tariqullah Khān said, “Accordingly the client
who orders goods from the Islamic bank is required to pay some part of
the price in advance as a commitment price. As in ʿarbūn in murābaḥ ah,
for any reason of his own, the client may abandon the transaction by
refusing to buy the goods and forgoing the commitment price. Hence,
for all practical purposes, in a murābaḥ ah transaction, the client buys
a call option on the goods of the bank. Suppose, the client buys these
goods for resale purposes, as is the case with the common stocks, would
the client be able to sell the ordered goods before he actually takes
possession of them?29
To give an example of the above case, Tariqullah Khān cites a Muslim
country which has ordered the Islamic bank for the supply of gasoline
on the basis of murābaḥ ah (has bought a call option on the gasoline
transaction of the Islamic bank) with the payment of US$100,000 as a
commitment price. Suppose the shipment of the gasoline to the country
has been initiated and the ship is on the high seas, but is still far from the
physical possession of the country. Suppose market conditions undergo
changes from the time of placing the order to the time of the present
location of the tanker. Therefore, the tanker-owner is motivated to offer
US$200,000 to the Muslim country and to buy the gasoline and redirect
it to another location. Assuming that the bank has no objection to this
arrangement in which the tanker owner replaces the Muslim country
in the contract, the point here to answer, Tariqullah Khān questioned:
can the Muslim country earn the additional US$100,000 over and above
the commitment price, which it has already paid? Suppose, two things
happen simultaneously: the Muslim country is no longer interested in
the gasoline for some reasons of its own and at the same time it has
28
Ibn Maniʿ, “Baḥth fi Ḥ ukm Bayʿ al-ʿArbūn”, pp. 180–181.
29
See, Tariqullah Khan, “Derivatives: Discussion Forum”, Islamic finance. net.
Journal, p. 4.
also this offer from the tanker owner. What type of decision will maxi-
mise the social as well as financial value and benefit in this situation?
Moreover, murābaḥ ah could very well be a leverage device.30
However, it seems that in the above situation the Muslim country has
sold its right to ʿarbūn or its right to option and it is not just a simple
murābaḥ ah lilʾāmir bi al-shirāʾ case. It goes beyond that and the legal-
ity of such a transaction could only be justified if we accept the sale of
pure right, an issue that will be elaborated later.
Moreover, the proposed case stated above could be better handled
through salam rather than murābaḥ ah. First of all, in principle the
agreement between the bank and the customer under murābaḥ ah is just
a promise, but it has been considered as binding by modern jurists by
way of necessity due to the complexity of modern commercial trans-
actions and because of that these scholars always call for the use of
other instruments of investment rather than murābaḥ ah. Moreover, no
scholar has considered the binding promise in murābaḥ ah as a full type
of contract while ʿarbūn in principle is applicable only with a contract.
In contrast, such scepticism would not arise with salam because it is a
genuine contract, then the problems associated with the binding status
of the promise will be overcome.
Secondly, there is a difference of opinion among Muslim jurists about
the legality of selling something before it is in the possession of the
buyer as in the above case. Such a difference of opinion will be much
wider if the arrangement is just a promise and not a contract whether
it is binding or not as is the case with murābaḥ ah lilʾāmir bi al-shirāʾ.
The issue of sale before possession in salam, although disputed by the
majority, is meanwhile, legalized by the Mālikī school and very well
defended by Ibn Taymiyyah and his disciple Ibn Qayyim. Therefore,
to resort to a solution, which has a precedent, and which has a strong
legal basis is much preferable to a case with disputed legal grounds and
without precedent in the work of the early scholars. Lastly, the issue of
selling an item before taking possession of it could be solved through
the idea of parallel salam, which is not possible in murābaḥ ah.
On the other hand, it should be noted that the expression ʿarbūn in
murābaḥ ah has been used in several works on Islamic finance. It seems
that what these scholars mean by ʿarbūn is a penalty or liquidated
damages on the one hand, and a pledge or rahan on the other, rather
30
Ibid.
248 chapter ten
than ʿarbūn in its strict legal sense. Thus several Islamic institutions
are including in their contracts on murābaḥ ah lilʾāmir bi al-shirāʾ a
liquidated damages clause but under the name of ʿarbūn. For instance,
in the resolution adopted by the Second Conference on Islamic banks
held in Kuwait, it is stated that ʿarbūn in murābaḥ ah is legal on the
condition that the Islamic bank should not take from the amount of
ʿarbūn given to the client more than the real damage.31 Meanwhile, a
practical approach to the above is reflected in Dubai Islamic bank’s
sample of contract on murābaḥ ah and the general steps for murābaḥ ah
sale as adopted by the bank.32
Furthermore, the following question addressed to the Sharīʿah Board
of the Faisal Islamic bank of Bahrain may shed more light on the issue.
The bank accepts advance payments as ʿarbūn from its clients when it
receives their order to purchase. The advance is then deposited in an
account maintained specifically for such payments until the time the
goods (that were ordered by the bank on behalf of its client) arrive and
the client takes possession of them. This amount is kept as a guarantee
against payment of the agreed amount of instalment in the murābaḥ ah
contract. There are certain clients, however, who seek the return of an
appropriate amount of the advance to their current account with every
payment of the instalment. What is your opinion on this matter?
The Sharīʿah Board answered that ʿarbūn may be defined as what is
paid as a first part of the whole price when a contract is concluded,
and the buyer’s option either retain the good or nullify the contract.
In the event the contract is nullified, the ʿarbūn advance will belong to
the seller. If the contract is not concluded, however, and never passes
beyond being a pledge (on the client’s part to buy from the bank when
the goods arrive), then, whatever the client (who desires to purchase)
pays in advance would not be considered ʿarbūn. Under such circum-
stances, the amount will remain as a trust in the hands of the seller
until the time the contract of murābaḥ ah is actually concluded; and thus
time it will become a part of the overall price. In case the two parties
consider the amount paid, (once the contract has been concluded), a
pledge or rahan that may be held against the instalments owned by the
buyer, then, this will be lawful as long as the parties abide by the rules
31
See, Bank Dubai al-Islāmī, Fatāwā Sharʿiyyah fi al-ʿAmāl al-Maṣrifiyyah, 1996,
vol. 1, p. 33.
32
See, Bank Dubai al-Islāmī, al-Murābaḥ ah, Markaz al-Tadrīb wa al-Buḥūth, 1996,
pp. 14–17 & 26–29.
of the sharīʿah that a cash pledge must not be used to the advantage of
the one holding it, i.e. the pledgee. Therefore, if the amount is invested,
the profits earned on the investment will accrue to the benefit of the
pledger (not the one holding it); and such an act should not take place
unless the pledger or the bank’s client gives his or her permission to
the pledgee to make such an investment.33
In another similar fatwā, the Sharīah Board confirmed the first fatwā
that in the case of such an advance payment before the conclusion of the
contract, or the case of a pledge to purchase, such as that in murābaḥ ah
lilʾāmir bi al-shirāʾ, the advance given by the purchaser, is not called
ʿarbūn, nor does it have the same legal status. Instead it is an amount
given to the “purchaser”, in case he fails to live up to the end of his
bargain, the advance amount may serve to compensate the bank for its
expenses. If there is a remainder, after the bank is compensated, it will
be returned to the client. If the advance is insufficient to compensate,
the “purchaser” should pay the rest. This is the opinion of those who
hold the view that a pledge or a promise to purchase in murābaḥ ah
lilʾāmir bi al-shirāʾ is binding.34
It may be noted here that despite the fact that the above clause is
not an ʿarbūn as it is legally defined but rather looks like a clause on
liquidated damages or a penalty, the Islamic financial institution using
it could manage its risk exposure to some extent. Although the above
clause is apparently similar to a clause of liquidated damages, in practice
some Islamic banks try to avoid the transfer of the dispute over the
assessment of the real damage, inflicted on it following the customer’s
failure to fulfill his binding promise to purchase, to the court as it is
the norm in dealing with such cases. They will try to insert, from the
beginning, a clause in the contract that in such cases, (amely the assess-
ment of the real damage inflicted), the dispute should be referred to
the Sharīʿah Board of the Islamic bank for a final decision which shall
not be contested in court.35 Indeed, such a clause will render the issue,
somehow, different from a pure penalty and save the Islamic bank the
cost and time of court proceedings. On the other hand, it should be
33
See Yusuf Talal DeLoenzo (editor and translator) A Compendium of Legal Opin-
ions on the Operations of Islamic Banks, Institute of Islamic Bank and Insurance, UK,
1998, p. 50.
34
See, ibid., pp. 21–22.
35
See Dubai Islamic bank’s sample on murābaḥah al-Murabaḥ ah, Markaz al-Tadrīb
wa al-Buḥūth, Bank Dubai al-Islāmī, 1996, p. 29.
250 chapter ten
noted that the Islamic Fiqh Academy in its final resolution no. 76/3/d8
disallows ʿarbūn in murābaḥ ah lilʾāmir bi al-shirāʾ.
ʿArbūn in Salam
Salam is defined as the sale or purchase of a deferred commodity for

a present price.36 Thus, in a salam contract, generally the price is paid
in advance while the commodity is deferred to an agreed date in the
future, such as, buying two tons of wheat which will be delivered one
year later while the price is paid on the spot. In such a case if the buyer
wants to cancel the contract before its maturity while he has already
paid the price of the commodity he intended to bay, he could ask for
the cancellation of the contract through iqālah. If the seller accepts his
request, the contract will be cancelled. Even if he asks for compensation
for this cancellation no legal problem would arise. However, a question
will arise whether it is legal for the parties to insert a condition in the
contract from the beginning that, in such a situation, the buyer shall
give the seller a specific amount of money as an ʿarbūn. It seems that
there is no legal problem in such a deal and the buyer should pay the
ʿarbūn to the seller if the initial agreement stipulates so, and there is no
possibility of ribā in this transaction. It is the buyer who has already paid
the price and will forfeit part of his money in exchange for the right to
cancel the contract. However, if the seller wants to cancel the contract,
the possibility of ribā arises. This is because he has already received
the price, which is for instance, US$1,000. Then, he will return it plus
US$100 as ʿarbūn or to get the right to cancel the contract after three
months from the conclusion of the contract, the possibility of ribā is
clear and it is similar to the case of borrowing US$1000 and returning
it US$1,100 after three months.
It has been reported from some prominent scholars from the Tabiʿīn
such as Said Ibn al-Musayyib, Shuraih, Ibn Sīrīn, Ibrāhim al-Nakhaʿi,
Said Ibn Jubair, Ṭ āwūs and Ibn ʿUmar from the companions, that it is
legal for the buyer who would like to return the commodity and cancel
the contract after the taking of possession, and the seller asks for some
money in exchange for such a cancellation to do so. Therefore, the above
case could be accommodated by an analogy to this case based on the
36
Ibn ʿĀbidin, Ḥ āshiyat Rad al-Muḥtār, p. 206.
opinion of the above scholars. This form of iqālah has some similarity
with bayʿ al-ʿarbūn. In fact, Imam Ahmad used the case as evidence
for the legality of ʿarbūn. In both cases, there is a cancellation of the
contract in exchange for a specific amount of money. On the other
hand, some others such as Ibn ʿAbbās, al-Shʿabī Atāʾ and Ḥ ammād
maintained that it is illegal.37 They described this form of iqālah as a
kind of a new contract, and in consequence it is illegal on the ground
that it involves the combination of two contracts (the contract of sell-
ing the commodity and that of cancelling it at a discounted price) in
a single transaction.38
However, it seems that this is not a form of combination of two con-
tracts as it has been explained before. It is just a kind of stipulation in
the contract, which does contradict its objectives and, therefore, Muslims
are bound by their stipulations unless it is a stipulation which prohibits
what is allowed, and vice versa. Therefore, it could be said that ʿarbūn
in salam is permissible if it is stipulated by the buyer. However, if it is
stipulated by the seller it will be illegal.
ʿArbūn in ʿIstiṣnāʿ
Similar to the case of salam as described above, where the purchaser

could ask for ʿarbūn without contravening the principles of the sharīʿah,
the buyer can also opt for ʿarbūn ʿistiṣnāʿ. Yet, some have voiced res-
ervations that such a deal would be a kind of talfīq because ʿistiṣnāʿ is
only recognized by the Ḥ anafī school as a non-binding contract while
ʿarbūn is only legalized by the Ḥ anbalī school. Thus, to add an option
to the Ḥ anafī opinion for which ʿistiṣnāʿ is not binding seems a radical
step.39
However, such an argument will be acceptable only if we consider
talfīq as a genuine source in Islamic jurisprudence. In reality talfīq is
not at all a source of Islamic law. It is a kind of taqlīd and since taqlīd
is not a part of the sharīʿah, talfīq will also be seen as such. Yet, some
modern scholars have argued in its favor but this will not change the
reality. Secondly, the imitation or the taqlīd of the prevailing schools
37
See Muṣannaf Ibn Abī Shaybah, vol. 6, p. 108; Muṣannaf ʿAbd al Razzāq, vol. 8.
p. 18.
38
Ibn Rushd, al-Muqaddimāt, p. 548.
39
See, Vogel and Hayes, Islamic law and Finance, p. 282.
252 chapter ten
is just a kind of weakness and lack of ijthād although even some early
scholars have mistakenly argued for such an act. Therefore, to judge
the legality of ʿarbūn in ʿistiṣnāʿ, the only requirement which needs to
be considered is whether or not such a transaction is in line with the
general principle of freedom of contracts and conditions. Thirdly, the
Islamic Fiqh Academy, in its resolution no. 66/3/7, has already endorsed
the opinion that ʿistisnāʿ should be binding on both parties and could
include a clause of liquidated damages. Similarly, it has endorsed that
ʿarbūn is legal in all kinds of sales except those kinds of sale which
require immediate delivery and ʿistiṣnāʿ is not such a contract. Therefore,
it could be concluded that arbūn in ʿistiṣnāʿ is legal.
Keeping in mind the above situation, suppose Kuwait Airways wants
to purchase ten Boeing 777 aircraft to be delivered in two years. Boe-
ing requires progress payments roughly parallel to the growing value
of the partially completed planes and an ʿistiṣnāʿ contract is drawn
up. However, Kuwait Airways is uncertain about the level of future
demand and wants the right to cancel the order at any time within the
first year of the agreement. The purchaser (with or without a parallel
ʿistiṣnāʿ arrangement providing financing) contracts an ʿarbūn with a
non-refundable deposit that will properly compensate Boeing (and any
financing intermediary) for losses and inconvenience if the cancellation
option is exercised.40
ʿArbūn as the Islamic Alternative to Options
Our purpose here is not to find a way to accommodate conventional

options as they are used nowadays in the international market but to
formulate a type of contract that fulfills the objectives of options as a
means of risk management and the possibility of transferring it from
one investor to another. ʿArbūn, as discussed above, has some similari-
ties with options. Thus, the basic rationale of options resembles that of
ʿarbūn especially in the sense that both can be used as risk reduction
strategies, or a method by which traders might wish to give themselves
flexibility before committing themselves to large contracts.
40
Ibid., pp. 281–282.
ʿArbūn as an Alternative to Call Option
Addressing the relationship between ʿarbūn and a call option, Kamālī

maintains that the basic rationale of an option resembles that of ʿarbūn
especially in the sense that both can be used as risk reduction strate-
gies. Suppose that a bakery owner wishes to expand his business and
thinks that the current market price of $2.50 per bushel of wheat is
reasonable. He may want to lock into the current market price for six
or nine months ahead, and yet, because of the element of uncertainty
in the success of his expansion plan, he may choose to tread cautiously
and decide to limit his possible loss to a small amount but still be able
to reserve the price level for the next several months. This he can do
by means of buying a call option on, say, ten wheat contracts of 5,000
bushels each, but instead of committing himself to the full price of such
a large contract he may decide to pay an option of $100 per contract.
This means he will have limited his possible loss to only $1000. The
basic notion can also operate along similar lines: the buyer risks a small
amount of money to give himself flexibility and also to limit his possible
losses to a much smaller amount.41
El-Gārī has upheld that achieving a balance between the two for-
mulas is not difficult. If we assume the presence of a central authority
(or several central authorities), such as the stock exchange authority or
the clearinghouse that concludes these contracts including one hundred
shares, for instance, for a fixed price on the basis of delivering them
within a specific period (90 days for instance). Instead of the investor’s
payment of a price for the option, he may pay a certain percentage of
that amount on the basis of advance on the sale. If he feels that it is in
his interest to go ahead with the sale during the period of time speci-
fied, he may sign the contract. If he feels that this course of action is
not in his interest, he will give up his claim to the advance payment.
Such a percentage may be raised or reduced depending on the factors of
supply and demand. What is paid against the transfer of risk is not the
least affected by the fact that such payment is a lump sum or a percent-
age of a sum known well in advance. Therefore, the formula suggested
above is quite appropriate to serve as a model for the call option and
41
Kamālī, Islamic Commercial Law an Analysis of Options and Futures, p. 369.
254 chapter ten
does not involve any contradiction with the rules and requirements of
the sharīʿah.42
On the other hand, after quoting parts of Ibn Qudāmah’s analysis on
ʿarbūn, Vogel and Hayes said, “The discussion shows how closely the
ʿarbūn contract can be analogised to the pure call option. It also shows
how, if it has been given the right market or institutional framework,
an ʿarbūn contract could be devised with results and pricing identical
or nearly identical to the call option”.43
Accordingly it could be concluded that ʿarbūn could be the Islamic
alternative to a call option without contravening sharīʿah principles.
However, the question remains as to what would be the Islamic alter-
native to a put option?
ʿArbūn as an Alternative to Put Option
The possible alternative to a put option in connection with ʿarbūn is to

include a condition in the contract that if the seller fails to fulfill his
contractual obligations, he should pay the buyer a certain amount in
the form of reverse ʿarbūn. Although the issue has not been directly
addressed by the classical scholars, the case of ʿarbūn in salam discussed
above is somewhat similar to this one.
To give an example of such a transaction and how it is needed, it could
be said that a retailer may enter with another into a salam contract to
purchase 1 million barrels of oil at a price of US$25 a barrel, which is
to be delivered within six months time. The buyer here is hoping that
the price of oil in the coming six months will reach US$30 a barrel.
Then, he will take delivery from his counterpart and sell his stock on
a retail basis to his client on the spot market to make some profit. He
pays the price at the time of contract, as it is stipulated by the majority,
or some time later, according to the Mālikīs.
However, four months after the signing of the contract, the buyer
realizes that his prediction may not be true due to some external factors,
such as weather, which is not as cold as it was in the year of issue and
therefore, the demand for oil fell unexpectedly resulting in sharp drop
42
See, Mohammad Ali El-Gārī, “Toward An Islamic Stock Market”, p. 14.
43
Frank E. Vogel and Samuel Hayes, III, Islamic Law and Finance, Religion, Risk,
and Return, p. 162.
in the price of oil. Or some oil producing countries, due to domestic

economic problems, increase their quotas of production which affects
negatively the price of oil in the international market which is now
US$23 a barrel and there is even a possibility that it may go down to
US$20. In such a case, the buyer may be willing to rescind the contract
and collect his money. After negotiations with the seller, the contract
is cancelled and the buyer has relinquished US$2 per barrel to the
seller in exchange for this cancellation. In such a case, the buyer has
minimized his loss. Thus, rather than losing US$5 per barrel, in case
he would have taken delivery from the seller on the agreed date, now
he is just losing US$2 per barrel.
Although such a transaction is permissible as a kind of iqālah based
on what is reported in Muṣannaf ʿAbd al-Razzāq and Ibn ʿAbī Shaibah
based on the opinion of the scholars mentioned above and could solve
the problem of such a risk partially, it is not sufficient in today’s volatile
and complex economic climate. It is quite possible that the seller may
not be willing to cancel the contract and consequently the buyer may
suffer a huge loss. Thus, to manage such a risk, the buyer may be willing
from the beginning to include a condition in the contract to the effect
that if the purchaser fails to take delivery, for one reason or another,
during an agreed period, he will have the right to rescind the contract
on condition that he forfeits to the seller US$2 per barrel.
Some modern Muslim jurists have addressed this issue. Al-Sanhūrī,
for instance, is of the opinion that if the seller, who has already received
the ʿarbūn, fails to fulfill his obligation, he should return twice the
amount of the first ʿarbūn as compensation to the buyer.44 This opinion
has also been endorsed by Rafīq al-Maṣrī who did not see any differ-
ence between the original ʿarbūn and the reverse ʿarbūn. In both cases,
the payment is in exchange for the right to cancel the contract or an
option with a price. Al-Maṣrī added that by giving this right to both
parties, the transaction will be much fairer than just giving it to one
party.45
However, some other jurists like al-Ḍ arīr have rejected the reverse
ʿarbūn without further analysis on the grounds that such a clause is only
discussed under secular legislation and not under Islamic legal works.
It should be noted that almost all Arab legislation has opted for the
44
al-Sanhūri, al-Wasīt, vol. 1, p. 261.
45
Rafīq al-Maṣrī, “Bayʿ al-ʿArbūn”, p. 730.
256 chapter ten
legality of reverse ʿarbūn, including the Jordanian civil code which is

recognized as being based on the principles of Islamic law principles.
Thus, al-Sanhūrī tried to prove that the reverse ʿarbūn is in accordance
with Islamic principles. However, according to al-Ḍ arīr, al-Sanhūrī did
not take the right path in this case.46
However, despite al-Ḍ arīr’s conclusion, it seems that al-Sanhūri’s
argument is legally well established. Al-Sanhūrī maintained that if Imam
Ahmad based his argument on the adoption of ʿarbūn by drawing an
analogy between ʿarbūn and the legality of the case where a person, who
has bought something but after some time wants to rescind the contract,
could do so by relinquishing part of the price to the seller. Therefore,
based on Imam Ahmad’s analogy, we can say that, as al-Sanhūrī argued,
it is possible to give to the seller also the right to rescind the contract
and pay the amount of ʿarbūn twice. Moreover, if it is permissible to give
the right to the buyer or the seller to rescind the contract in exchange
for something, it is possible to grant it to both of them in a contract
at the same time.47
Considering this difference of opinion and the absence of any explicit
text regarding the issue, we will try to discuss it in line with the general
theory of freedom of contract. Thus, it is clear that such a stipulation
does not contradict the objective of the contract or any explicit text.
Moreover, it is to the benefit of the contract and agreed upon by both
parties with their full consent. Therefore, it is a legal condition or
clause as Imām al-Shāf ʿī said, “in principle all contracts are permissible
if they are concluded with the full consent of the parties unless there
is an explicit text from the prophet to prohibit such a sale, or such a
prohibition could be understood from the explicit text”.48 Similar state-
ments have been echoed from different scholars of the different schools
of Islamic law.49 Thus, it could be concluded that the reverse ʿarbūn is
legally permissible and could serve as an alternative to a put option.
On the other hand, El-Gārī tried to come up with what could be
considered as a similar formula to a put option by suggesting this trans-
46
Mjallat Majmaʿ al-Fiqh al-Islāmī, discussion (about ʿarbūn), p. 759.
47
Abd al-Razzāq al-Sanhūri, Maṣādir al-Ḥ aq, Dār al-Maʿārif, Cairo, vol. 2, p. 96.
48
al-Shāfii al-ʿUmm, vol. 3, p. 3; Ibn Rushd, al-Muqaddimat al-Mumahhidāt, vol. 2,
pp. 61–62.
49
See for instance, Ibn Rushd al-Muqaddimāt al-Mumahhidāt, vol. 2, pp. 61–62;
Ibn Taymiyyah, Majmūʿ al-Fatāwā, vol. 29, p. 226; Ibn ʿĀbidīn, Rad al-Muḥtār, vol. 4,
p. 176.
action may be reached on the basis of the assumption that the contract
involves the rendering of a service by a certain party who is holding
shares and wishes to sell them. The fee paid for the service rendered,
the period and effort are fixed by the investor in agreement with that
party. It would not serve the purpose, if that party looked for a buyer
as soon as possible. What is required is that a buyer should be found
within a certain period (for example 90 days) during which an investor
will have the option. The party referred to is some central authority such
as the stock exchange administration or a clearinghouse at the exchange
or the market maker but not stockbrokers or investors. The function of
this party is actually the rendering of this service. Such a party is not a
stockbroker who is an agent. The entity should act in a manner similar
to the formula of the European rather than the American options.50
El-Gārī’s proposition seems to be based on the contract of ijarāh and
juʿālah. However, the practical success of the formula as an alternative
to a put option needs to be ascertained especially when El-Gārī himself
acknowledges that in certain circumstances, (namely when the buy
orders fall short of the sell orders), some problems may arise.
Another proposition about a put option is the suggestion by Vogel
and Hayes under the concept of the third party guarantee in which a
customer can use a bank as a guarantor. The bank would be compen-
sated by an administrative fee paid by the purchaser of the item. To be
Islamically acceptable, this fee cannot be stated as a percentage of the
value of the contract. In case of default, the bank can seize and sell the
item to help satisfy the purchaser’s remaining obligations to the seller.
From the purchaser’s viewpoint, the third party guarantee can be taken
as a put option obtained from the bank in exchange for a premium.
If at some future time the purchaser concludes that the item is not as
valuable as the remaining instalments, he could theoretically stop pay-
ing the instalments to the seller and surrender the item to the bank.
This is, therefore, a put option with a strike price equal to the remain-
ing instalment payments (as a practical matter however, he can write a
provision allowing him to recover from the purchaser any loss thereby
suffered). Assuming that the bank sold guarantees to many customers,
50
See, Mohammad Ali El-Gārī, “Toward An Islamic Stock Market”, pp. 15–16.
258 chapter ten
its aggregate risk would be reduced through diversification, and it could

use collected premiums as a reserve fund.51
However, if we consider the fact that in conventional options the
premium varies according to the forces of supply and demand and the
price of the underlying asset, or the fact that the down payment in
ʿarbūn also varies according to the purchased item, then the premium
in the third party should vary in a similar manner. And if it varies in
the same manner, it will no longer be an administrative fee but a price
for the guarantee, which, in principle, in order to be legally acceptable
should be without a price. Secondly, if the purchaser of the item requests
the guarantee from the bank, not because he is in need of such a guar-
antee but just to benefit in future from the change in the value of the
item and the remaining instalments, he will not be acting in good faith
whereas, as a matter of principle, in Islamic law all transactions must
be concluded and executed in good faith. Despite these remarks, the
practical value of the above propositions may not be discounted totally
although the present study prefers the reverse ʿarbūn as the alternative
to a put option.
It is now worth looking into the points of difference between option
and ʿarbūn as postulated by some contemporary Muslim jurists. These
objections could be summarized in the following points:
1. An option requires payment for something that is a mere intangible

“right”, not property (māl) in the usual sense of tangible good or a
utility taken from a tangible good, as for this alone compensation
can be demanded. Then, the option price is “unearned”.
2. The right of option is given to the buyer as well the seller while
ʿarbūn is given only to the buyer. The price of the option is separate
from the price of the underlying commodity and one could sell it
or give it as a gift, which is not the case in ʿarbūn.
3. The objective of option trading is not the benefit of the contract,
where the buyer receives the commodity and the seller receives the
price, they, rather, look, for price differentials. Moreover, in the exer-
cise of the option, only one party can gain from the contract while
the other must lose. Whether a party will gain or lose depends on
unknown future market prices.
51
See Frank E. Vogel and Samuel Hayes, III, Islamic Law and Finance, Religion, Risk,
and Return, pp. 228–229.
4. In most actual option contracts, the parties have no intention of

taking delivery, but only of liquidating their contracts against the
price differentials. In every lawful Islamic sale, on the other hand,
the parties fix their exchange fully and finally in the present. Thus,
the entirety of at least one of the countervalues is at least presently
owed, even if not immediately paid.
5. The underlying asset in an option is not only a commodity as it is
the case in ʿarbūn but it could also be currency or even stock indices,
which are a kind of gambling.
6. The price of an option is determined by the movement of interest
rates, which is not Islamic.
7. If the option is in currency, not even forward sales are allowed since
currencies may be exchanged only on the spot.52
It is clear that the first objection is the most important one. It is directed
to the essence of the contract by invalidating its subject matter. However,
we will deal with it in the coming chapter in more details.
Concerning the second objection, namely the right to rescind the
contract being given to both the seller and the buyer while in ʿarbūn it is
only granted to the buyer, it could be said that even if this right is guar-
anteed to the seller, no ribā or gharar is involved in such a transaction.
Moreover, it does not contradict any specific sharīʿah text. Therefore, it is
a legal transaction based on the general theory of freedom of contracts
and stipulations. Similarly, the right to option in khiyār al-sharṭ was
originally guaranteed by text only to the seller but later it was extended,
by way of ijihād, to the buyer or both of them. Therefore, to extend the
right to ʿarbūn to the seller as well, is a similar case, as long as it does
not contradict a specific text and, indeed, such an extension does not
contradict any text. But it is rather a condition that is harmonious with
the benefit of the contract and its objectives.
The third objection is that the parties are just looking for price dif-
ferentials and are not willing to fulfill the objectives of the contract; it
could be said that the issue of price differentials has been declared as
unlawful by some Muslim scholars who equate it with excessive specula-
tion, which will lead to market instability and then injustice. Moreover,
52
Mukhtār al-Salāmī, “al-Ikhtiyārāt”, Majallat Majmaʿ al-Fiqh al-Islāmī, p. 233;
al-Zuhaili, “al-Ikhtiyārāt”, Majallat Majmaʿ al-Fiqh al-Islāmī, p. 256, ʿAbū Ghuddah,
“al-Ikhtiyārāt”, Majallat Majmaʿ al-Fiqh al-Islāmī, p. 334.
260 chapter ten
not every issue of price differentials is speculation or excessive specula-

tion. For instance, commenting on the relationship between ʿarbūn and
options Rafīq al-Maṣrī said “options are illegal for many reasons among
others the objective of the parties is to look for price differentials. We
are not saying options are illegal because paying a premium is illegal
but because the objective is to look for price differentials which we see
it as illegal.53
From this statement it is clear that al-Maṣrī opposes options not
because of the contractual form of options or because the sales of right
is not in line with the sharīʿah but because the objective of the partici-
pants is to look for price differential. However, the issue of price differ-
entials is raised also against other transactions, which are unanimously
considered as contractually legal such as the ordinary sale/purchase of
shares and commodities unless the buyer has the intention of buying
and keeping the shares for some time. Therefore, it is not because of
the nature of the contractual form of options but because of the way
in which they are traded. Although it may lead sometimes to market
speculation, one should not forget at the same time that sometimes it
is necessary to solve the problem of liquidity for some genuine traders
who want to hedge against possible risk. Moreover, such a stand may
lead to the evaporation of the idea of an Islamic market.
We have already elaborated on the issue while addressing the issue
of speculation while some of its forms which are closely related to
gambling and options are discussed in another section.
Concerning the objection that the underlying asset in options is not
only the commodity as is the case with ʿarbūn but it could also be cur-
rency and even stock indices which are a kind of gambling, we have
already indicated that ʿarbūn could not be used for currency, stock
indices or interest rate options trading. Therefore, any objection about
the use of ʿarbūn as the Islamic alternative to options should be limited
to commodities and shares where there is a possibility of options from
an Islamic point of view.
Regarding the point that the price of options is determined by the
movement of interest rates, it could be said that in an ordinary ʿarbūn
market, there is no possibility of determining the price through interest.
Moreover, the alternative to options through ʿarbūn is just limited to
the primary market. Therefore, the objection may have some legitimacy
53
Rafīq al-Miṣrī, “Bayʿ al-ʿArbūn”, p. 725.
with regard to the Islamic alternative if it is possible to trade it in the

secondary market. Even here it may not be a real effect of interest rate
in the Islamic alternative of options as we shall elaborate.
Furthermore, the determination of price in the already approved
Islamic modes of investment is not determined by interest rates. There-
fore, the determination of price in options would not be an exception.
Yet, in cases of determination of the rate of return, the practice of Islamic
financial institutions seems to be closely related to LIBOR (London inter
bank rate). The response of some leading Muslim economists is that
An equity based Islamic economy does not exist, and a representative rate
profit is not available to serve as benchmark for determining the rate of
return in secondary modes. The banks have, therefore, no other alternative
but to use the LIBOR for this purpose. This makes the secondary modes
appear similar to interest-based operations. However even if a represen-
tative rate were available, market may not necessarily allow the banks to
move away significantly from LIBOR. This is because if they charge a
rate significantly higher than LIBOR for their lending, they might lose
at least some of the users of their funds to conventional banks. If they
charge a rate significantly lower than LIBOR, they might be able to give
a lower dividend to their depositors and shareholders thus driving some
of them to the conventional banks. Therefore, as long as conventional
financial system dominates the world financial markets, Muslims may have
to bear with the Islamic banks in their use of LIBOR as an approximate
benchmark at least in the initial phase of Islamization.54
Thus, it is clear that just to rely on LIBOR in order to determine the
rate of return does not put into question the Islamicity of a transaction
simply because it is not part of the contract itself. Yet, to determine the
rate of return, we have to take into consideration the overall performance
of the economic environment we are operating in, which, is dominated
by the use of interest rate. Indeed it is almost impossible to do business
without taking into account the different factors that affect the business.
In a similar observation and response to the criticism that Islamic banks
are using interest rate as a criterion for fixing the profit margin in the
murābaḥ ah sales, Sāmi Ḥ asan Ḥ amoud said:
As a matter of fact there is no known way of avoiding the link with
this criterion as long as Islamic banks are operating within an environ-
ment where they coexist with traditional banks. But, what is required
54
Umar Chapra, “Islamic Banking and Finance: The Dream and Reality”, Hamdard
Islamicus, Karachi Pakistan, vol. XXII, no. 4, p. 74.
262 chapter ten
from Islamic banks is to avoid exceeding the prevailing interest rate or

exploiting the clients through accounting methods which some of them
employ, which involve calculation of the absolute profit rate while paying
no consideration to the installments paid during the year.55
Similarly, even if the pricing of option in the Islamic alternative is
affected by the movement of interest rate, it is not a part of the con-
tract itself but rather a part of the different factors affecting any busi-
ness activity in the contemporary world or like the effect of LIBOR in
determining the rate of return in Islamic bank.
Moreover, it should be noted that among the five factors affecting
options pricing, namely strike price, underlying price, time to expiry,
volatility, interest rate and time of expiry, interest rates have the least
influence on options.56
More importantly, the relation between option pricing and interest
rate can be taken as an opportunity cost. In order to buy an option, the
buyer must borrow funds or use fund in deposit. Either way the buyer
incurs an interest cost as it is maintained in the conventional system of
option trading. If the interest rates are rising, then the opportunity cost
of buying the options increases, and to compensate the buyer premium
costs fall. This is because the option writer receiving the premium can
place the funds on deposit and receive more interest than was previously
anticipated. The situation is reversed when interest rates fall, premium
rise. This time it is the writer who needs to be compensated.57
It should be noted that in the Islamic alternative there is no possibility
of borrowing with interest or depositing in order to benefit from any
interest rate rise. Therefore, the effect of interest rate on option pricing
is out of context. Moreover, it may be asked why the rate of return in
murābaḥ ah, for instance, is not used as a substitute to interest rate. This
is because initially the effect of interest rate in option pricing arises due
to the fact that the option writer who receives the premium in con-
ventional system of option trading can place the funds on deposit and
receive more interest. The Muslim investor, on the other hand, can place
the fund in murābaḥ ah investment in order to get benefit. The choice
of murābaḥ ah is that although the rate of return in murābaḥ ah is not
guaranteed as it is in interest rate but the risk is minimal. Therefore, it
55
Sāmī Ḥ asan Ḥ amoud, “Progress of Islamic Banking: The Aspirations and the
Realities”, Islamic Economic Studies, June 1994, pp. 125–126.
56
See The Reuters Financial Training Series, An Introduction to Derivatives, p. 88.
57
Ibid.
could be a substitute to the formula involving interest rate. It is worth

noting that even in the conventional system of option pricing, one uses
many formulas, not one. The famous mathematical model to evaluate
a premium is that developed by Black and Myron Scholes in 1973.
However, other mathematical formulas such as the Binominal Theory,
the Cox Rubenstein, and Garman-Kohlhan version of Black and Myron
Scholes are also used. Therefore, traders in different markets may use
different models for pricing options and there is no guarantee that two
traders will derive the same premium for the same option.58
Therefore, it is argued that if even in the conventional system there
is no hundred per cent accuracy about the exact price of an option and
there is no guarantee that two traders will derive the same premium
for the same option and, if the whole issue is to look for something
approximate to reality, then the rate of return in murābaḥ ah could play
that role.
On the other hand, the volatility factor which is the measure of the
rate of fluctuation of market prices in the underlying instrument is the
important factor to be calculated in the option pricing models59 which
shows that options trading is related to the market of the underlying
asset and not in total isolation as it is claimed by some.60
The third factor is the underlying price. The premium is affected
by the price movement in the underlying instrument. For call option
which is the right to buy the underlying asset at fixed strike price, as the
underlying price rises so does its premium. Similarly as the underlying
price falls so does the cost of he premium. Regarding put option which
consists of the right to sell the underlying asset at a fixed strike price,
as the underlying price rises, the premium falls and as the underlying
price falls the premium cost rises.61
Concerning the objection that an option incorporates the idea of a
future sale, it could be said that the idea of a future sale is accepted by
Islamic law in other places such as al-bayʿ al-muʾajjal, salam and ʿistiṣnāʿ,
therefore, the idea of a future sale in itself could not be a genuine legal
ground for objection.
Thus, it is clear that none of these objections against ʿarbūn as an
alternative to options is well founded or genuine and we could conclude
58
Ibid., p. 87.
59
Ibid., p. 89.
60
Ibid.
61
Ibid., 87.
264 chapter ten
that it is possible to use ʿarbūn as an alternative to a call option while

“the reverse ʿarbūn” could be used as alternative to a put option.
Does Options Trading Involve the Combination of Two Contracts

in One Transaction?
Another objection raised against options is the claim that it constitutes

two contracts in one transaction or bayʿataini fi bayʿatin wāḥ idah: the
contract to exchange the right to option with the premium and the
original contract to buy or sell the commodity shares or the underly-
ing asset.62 This claim has been advanced by some scholars like ʿUmar
ʿAbd al-Ḥ alīm and Samīr Riḍwān. However, this objection is based on
shaky foundations. First of all, we agree that there are several genuine
aḥ ādīth reported from the Prophet (PBUH) prohibiting the sale of
bayʿataini fi bayʿatin wāḥ idah or the combination of two contracts in
one transaction. However, none of the interpretations of Muslim jurists
given to these aḥ ādīth could be considered similar to the case of options
trading. Therefore, it is necessary to mention briefly the different inter-
pretations given to these aḥ ādīth in order to show ʿAbd al-Ḥ alīm and
Samīr Riḍwān’s misinterpretation. There is a general agreement about
the prohibition of such a sale by Muslim jurists but they differ in their
interpretation of its nature.
In the first interpretation one says to another ‘I will buy this item
from you for ten dīnārs cash and for 15 dīnārs if I have to pay one year
later’. The seller agrees without identifying in which of the two terms
of the deal the contract is concluded. This interpretation is reported
from Imām Mālik,63 al-Nasāʾī64 and al Shāf ʿī65 in one version. There is
no difference among Muslim scholars about the illegality of this kind of
sale because of the gharar in the price, since nobody knows on which of
the two terms the contract has been concluded. However, if the parties
have chosen one of the two terms for the conclusion of the contract,
then, it is a valid contract.
In the second interpretation one says to another ‘I will sell my car to
you for 8,000 dīnār with the condition that you will sell your house to
62
ʿAbd al-Ḥ alīm, ʿUmar, al-Iqtiṣād al-Islāmī, p. 50.
63
Imām Mālīk, Al-Muwaṭtạ ʾ, vol. 5, p. 39.
64
Sunan al-Nasāʾī, vol. 7, p. 295.
65
al-Nawawī, al-Majmūʾ, vol. 9, p. 321; Nihāyāt al-Muhtāj, vol. 3, p. 433.
me for 10,000 dīnārs’. This interpretation has been reported from the
Ḥ anafīs,66 Ḥ anbalīs67 and al-Shāf ʿis68 in their second opinion.
In the third interpretation the buyer says to the seller, ‘I will buy one
of the these cloths from you, for instance, if it is the first, it will be for
two dīnārs and if it is the second it will be at three dīnārs’. Imām Mālik
prohibits this kind of sale on the ground of blocking the means or sad
al-zarāʾiʿ because it is a kind of ribā. However, some of his followers
objected to his interpretation arguing that this kind of sale should be
declared legal and it is part of khiyār al-taʿyīn.69
The fourth interpretation is reported from Ibn Qayyim who, after
rejecting the first interpretation says “it is when someone says to another
person I am selling to you this item on deferred basis lasting for one
year, for one hundred dirhams, for instance, on condition that I will buy
it from you immediately after selling it to you now for eighty”. Then he
commented that this is the only interpretation of this ḥ adīth and no
other interpretation could be given to it. This interpretation is also in
line with the other ḥ adīth on the issue that, “whoever is involved in
such a sale has only two possibilities whether to take the price which
is to his disadvantage or take the ribā”. Commenting on Ibn Qayyim’s
interpretation al-Qaraḍāwī said, “This is the interpretation, which we
prefer because it is in line with the objective of the ḥ adīth, which warns
against bay ʿal-ʿīnah and the use of tricks (ḥ iyal) which lead to ribā.70
These are the main interpretations of these aḥ ādīth and the above
mentioned concept of sale. However, it is clear that none of them would
be associated with options trading and in consequence Samīr Ridwān
and ʿAbd al-Ḥ alīm’s claim is unfounded.
66
Al-Sharakhsī, al-Mabsūṭ, vol. 13, p. 16; Ibn al-Humām, Fatḥ al-Qadīr, vol. 5,
p. 218.
67
Ibn Qudāmah, al-Mughī, vol. 4, pp. 233–234.
68
Al-Shaf ʿi, al-ʿUmm, vol. 3, p. 67.
69
Al-Bājī, al-Muntaqā, vol. 5, p. 109; Ibn Rushd, Bidāyat al-Mujtahid, vol. 2, p. 154.
70
Al-Qaraḍāwi, Bayʿ al-Murābaḥ ah li al-ʿĀmir bi al-Shirā Kamā Tujrīh al-Maṣārif
al-Islāmiyyah Dirāsah fi Dawʿ al-Nuṣūṣ wa al-Qawāʿid al-Sharʿiyyah, Makṭabat Wahbah,
Cairo, 1987, p. 53.
CHAPTER ELEVEN
THE SALE OF PURE RIGHTS AND THE LEGALITY

OF OPTIONS
One of the most commonly cited arguments to invalidate options is the

claim that option trading involves the sale of a pure and simple right
(ḥ aqq mujarrad) and such a right is neither a tangible commodity nor
a usufruct, therefore, it cannot be a proper subject matter of contract in
Islamic law. The issue is at the heart of the legality of options contracts,
because if the subject matter of a contract is invalid, the whole contract
is invalid since there is no valid contract without a subject matter.
The first part of the above argument that option trading involves
the sale of a pure right is correct; and to claim that such a right could
not be considered as subject matter of a contract in Islamic law, is
misleading. Yet, some early Ḥ anafī jurists have defended this opinion
based on their ijtihād and the economic conditions prevailing at that
time. While the other three major schools of Islamic law and the later
day Ḥ anafī scholars opposed the previous stand. Unfortunately, many
contemporary Muslim jurists have opted for the opinion of the earlier
Ḥ anafī for reasons, which have never been defended by its partisans and
which are, at the same time, difficult to understand given the fact that
the whole issue of the sale and exchange of rights is based on custom
and public interest. On the other hand, some other scholars have opted
for the majority view that a right related to property is a usufruct and
qualifies as property, but not in relation to options, which is the issue of
our study, but in relation to other legal issues based on the sale of right
such as intellectual property and copyright. Nevertheless, such opinions
may serve as a source of guidance and analogy to our case study.
In relation to the issue of options in particular, only a few schol-
ars have opted for the validity of exchanging such a right for money.
Included among these are Kamālī, in his work Islamic Commercial
Law An Analysis of Futures and Options, Youssuf Sualimān, in his
article “Raiʾ al-Tashrīʾ al-Islāmi fi Masāʾil al-Burṣah” followed by ʿAli
ʿAbd al-Qādir’s comments about it and Shahhāt al-Jundi in his book
Muʿāmalāt al-Burṣah fi al-sharīʿah al-Islāmiyyah.
sale of rights and legality of options 267
Kamālī, for instance, argued, “the parties have the freedom to insert
stipulations in contracts but also that a monetary compensation or a
fee may be asked by one who grants an option or a privilege to the
other. If the seller is entitled to stipulate for a security deposit or pawn,
then it is a mere extension of the same logic that he may charge the
buyer and impose a fee or compensation in respect to such options
and stipulations that are to the latter’s advantage . . . we conclude that
options may carry premium and there should be basically no objec-
tion to this”.1 Youssuf Sualimān, ʿAli ʿAbd al-Qādir and al-Jundī, have
advanced similar arguments based on the general theory of freedom
of contracts and stipulations.
The Islamic Investment Study Group of the Securities Commission
in Malaysia has opted for a similar opinion in one of its reports while
discussing the legality of call warrants, arguing that such a right has
the characteristics of an asset, which satisfies the concept of ḥ aqq mālī
or financial right which is transferable since it could be possessed and
one can benefit from it. Thus, Sheikh Azmi Ahmad maintains that after
an in-depth investigation, the Islamic Investment Study Group of the
Securities Commission approved that call warrant is an instrument
within the principles of sharīʿah based on the following factors.
• A call warrant has the characteristics of an asset, which satisfies the

concept of ḥ aqq mālī, which is transferable based on the majority
view the exception of the Ḥ anafī school. Therefore, this right can
be classified as an asset and can therefore be traded, possessed and
benefited from.
• A call warrant is recognized by ʿurf as a valuable item within a lim-
ited period and can be traded. It has the same characteristics of a
coupon by which the holder has the right to buy something within
the stipulated time.
• The exercise period and the price of a call are fixed and determined
at the time of the issue of the call warrant. This will ensure that the
owner of the call warrant will be able to exercise his rights at any time
he wishes. When the call warrant is traded in the secondary market,
the price will be reflective of market forces of demand and supply.
Therefore, gharar elements in this contract can be eliminated.
1
Kamali, Islamic Commercial Law: An Analysis of Option and Futures, pp. 356–357.
268 chapter eleven
• Legally there is complete transfer of ownership when the call warrant

is transacted. Therefore, the issue of trading before qabḍ does not
arise.
• Imam Ahmad has laid the foundation for the terms and conditions
of contracts and the Islamic Investment Study Group of the Securities
Commission has used it as a guideline for analyzing the call warrant,
which is in line with these terms and conditions.
• A call warrant is not the same as buying a right to choose (ḥ aqq
al-khiyār), which is the right given while purchasing goods. On the
other hand, a call warrant gives a right and not an obligation to buy
a fixed asset.
• Ribā al-buyūʿ (sale related riba) does not exist in the trading of a call
warrant, because it is exchanged for money and not for another call
warrant of the same kind.
• Most importantly, the Islamic Investment Study Group held that the
underlying asset of the call warrant must be a ḥ alāl asset and the
trading contract must be conducted according to Islamic principles
and practices.2
The Islamic Investment Study Group relied also on the report of Nāfiʿ Ibn
al-Hārith, caliph ʿUmar’s officer in Makkah to the effect that he bought
a prison house from Safwān Ibn Umayyah for the caliph ʿUmar for four
thousand dirhams on the condition that if the caliph approved it, the deal
would be final, otherwise Safwān would return four hundred dirham.3
And by what is reported in al-Bukhārī and narrated by Ibn Sīrīn that “a
man said to a hirer of animals, ‘prepare your travelling animals and if
I do not go with you on such and such day, I shall pay you a hundred
dirhams. But he did not go on that day. Shuraih said: If anyone puts a
condition on himself of his own free will without being under duress,
he has to abide by it”. Commenting on these two reports, The Islamic
Investment Study Group concluded, “this shows that there are practices
of paying for the right to buy or to rent something. However, there is no
2
See, Sheikh Azmi Ahmad, “Islamic Instruments Study Group: A Report”, paper
presented in International Islamic Capital Market Conference, Ballroom, Crown Princess
Hotel, Kuala Lumpur Malaysia, pp. 8–9.
3
Ibn Qayyim, ʿIlām al-Muwaqqiʿīn ʿan Rab al-ʿĀlamīn, vol. 3, p. 389.
dalīl to prove that this right could be transferred. Therefore, the issue
is whether this right could be transferred or not”.4
Although the present study will argue for the same conclusions, that
is those of Kamālī and the Islamic Investment Study Group, the above
arguments seem to have been based on the general theory of freedom of
contract and conditions where the Ḥ anbalī position is the most liberal
and in line with the objectives of the sharīʿah. Although this principle
is fundamental and the primary basis for the legality of selling a right,
it seems to be too general to face the huge literature and arguments
advanced against the permissibility of selling a pure right. Therefore,
more evidences are needed in order to prove beyond reasonable doubt
the legality of selling a right. Furthermore, the opponents of the sale of
rights advance their arguments depending on the opinion of some early
jurists, such as, Ibn ʿĀbidīn, by quoting their statements as evidence for
the illegality of the sale of pure rights. Therefore, it seems that it could
be effective to prove the opposite from the same sources, namely the
early works of Muslim jurists.
On the other hand, it should be noted that the Islamic Investment
Study Group has differentiated between the right in a call warrant and
the right of khiyār in a sale, which seems to be unwarranted if it is
meant by ḥ aqq al-khiyār, in khiyār al-sharṭ because the two rights are
of the same nature and, therefore, could not be reasonably distinguished
from one another.
On the opposite side, namely the stand that options involve the
sale of a pure right, which is illegal in Islamic law, and which renders
trade on options illegal, we found the participants in the Islamic Fiqh
Academy discussion on options adopting a more general stand con-
cerning the sale of pure rights (al-ḥ uqūqq al-mujarradah). For instance,
we found Mukhtār al-Salāmī5 quoting only the general statement of
al-Kāsānī that “pure rights could not be exchanged” itself quoted by
Ibn ʿĀbidīn in Rad al-Muhtar. Similarly, al-Ḍ arīr6 has quoted only
one passage from Ḥ āshiyat Ibn ʿĀbidīn to show that a pure right could
not be exchanged. But one may ask if our respected scholars want to
limit themselves to just a single quotation from the classical sources of
Islamic law to justify their conclusion in such an important and totally
4
See, Sheikh Azmi Ahmad, “Islamic Instruments Study Group: A Report”, pp.
7–8.
5
Al-Salāmi, “al-Ikhtiyārāt”, p. 235.
6
al-Ḍ arīr, “al-Ikhtiyārāt”, p. 264.
270 chapter eleven
new phenomenon, why not quoting from the Mālikī school’s works, the
prevailing mazhab in Tunisia and Sudan, the country of al-Salami and
al-Ḍ arīr respectively and which is the most flexible school in legalising
the exchange of rights? However, such an approach may be understood
if we put it in the context of importance given to the issue of options
as a whole when three out of five of those who presented papers on
options acknowledge that they have only prepared a short paper.7 Yet,
it is logically impossible for a short paper to give the necessary analysis
of a topic, which is totally new. ʿAbd al-Wahhāb Abū Sulaimān in his
paper, on the other hand, referred to more works concerning the concept
of right but his analysis is not convincing. For instance, after reporting
the opinion of the Ḥ anbalīs in the division of the concept of right, he
gives the example of khiyār al-sharṭ as an example of rights, which have
no relation with property. Then he concluded that the right to option
in conventional option trading is similar to that of khiyār al-sharṭ and
therefore, it could not be the subject matter of a contract and could
not be inherited. Moreover, it has no corporal physical existence and
therefore, a contract in such a thing will be a contract in a nonexistent
thing (bayʿ al-maʿdūm), which is illegal in Islamic law.8
However, such an analysis on the division of the concept of right is
somehow inadequate for the following reasons: First of all, it did not
refer to the opinion of other schools of Islamic law especially the Mālikīs
and Shāf ʿīs who consider the right in khiyār al-sharṭ as a right related
to property which therefore, could be inherited. Secondly, even the
Ḥ anbalī position is not well discussed. They maintained that the right
in khiyār al-sharṭ could be inherited only if the beneficiary requested
that. Does this mean that the request of the beneficiary will transform
this right from a right, which is unrelated to property to a right which
is so to it? The discussion of the whole issue will be investigated later.
Now we are just pointing to ʿAbd al-Wahhāb Abū Sulaimān’s analysis.
Furthermore, it seems a little strange for Abū Sulaimān to consider the
sale of such a right as a part of bayʿ al-maʿdūm because it has no physi-
cal existence. But what will be Abū Sulaimān’s response to the different
cases involving the sale of rights legalized by classical jurists or those
legalized by the Fiqh Academy itself, as we will touch on some of them
7
Majallat Majmaʿ al-Fiqh al-Islāmī, “al-Ikhtiyārāt”, discussion session, no. 6 vol. 1,
pp. 565; 569; 573.
8
ʿAbd al-Wahhāb Abū Sulaimān, “al-Ikhtiyārāt”, Majallat Majmaʿ al-Fiqh al-Islāmī,
no. 6 vol. 1, pp. 307–308.
later? On the other hand, addressing the issue of the subject matter in
a sale contract in the Mālikīs school, Abū Sulaimān concluded that the
Mālikī position is that the subject matter should be a physical thing
and be present at the time of contract whether in reality or at least
in a constructive manner (bi al-quwwah). However, what will be Abū
Sulaimān response to the Mālikī’s stance which allows the sale of the
right of shuf ʿah (pre-emption) or other rights legalized by the Mālikī
school as we will elaborate later?
Meanwhile, ʿAbū Ghuaddah’s paper compared the right in conven-
tional options with that of khiyār al-sharṭ and concluded that the right
in khiyār al-sharṭ is not a right related to property (ḥ aqq mālī) and
therefore, it could not be inherited or exchanged.9
However, it is somewhat amazing to note that Abū Ghuaddah in his
book Al-Khiyār waʾAtharuhu fi al-ʿUqūd,10 which was originally his doc-
toral dissertation, concluded that the right of option in khiyār al-sharṭ
is a right related to property and, therefore, it could be inherited. Yet,
we may say he has changed his first opinion since it is normal for a
Muslim scholar to change his opinion on a specific issue if he comes
across new evidence to sustain the new position. Unfortunately, in his
paper on options Abū Ghuaddah fails to bring forward any new evidence
to rebut the strong argument he advanced in his early book.
This position has also been adopted in the final resolution of the
Academy despite the fact that some of the participants in the discus-
sion have voiced the opposite view. Thus, the resolution read “options
contracts as currently applied in the world financial market are a new
type of contracts which do not come under any one of the sharīʿah
nominated contracts. Since the subject mater of the contract is neither
a sum of money nor utility or a financial right, which may be waived,
therefore, the contract is not permissible in the sharīʿah”.
This resolution has a great impact on other studies on options later
whether by rejecting options from the beginning because a pure right
could not be considered the subject matter of a contract since it is not
a māl or property or by attempting a new alternative, which should
not involve the sale of a right. Thus, El-Gārī for instance, maintained
that “if we consider the above contract as an independent agreement,
9
Abū Qhuddah, “al-Ikhtiyārāt”, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 6 vol. 1,
p. 334.
10
ʿAbd al-Sattār Abū Qhuddah, al-Khiyār waʾAtharuhu fi al-ʿUqūd, Dallah al-Barakah,
Jeddah, pp. 317–325.
272 chapter eleven
that is separate from the sale contract and its subject is a right and
an obligation (i.e. a right for the buyer and an obligation towards the
seller), then the problem is that in the sharīʿah, the subject involved is
not eligible to become the substance of a sale contract. The said right
does not have a tangible and material quality, but it is indeed intangible
and may not be sold or bought. It is only similar to a pre-emptive right
(shuf ʿah, right of custody and guardianship) all of which, while allowed
in the sharīʿah, are intangible rights that are not allowed to be sold or
relinquished against monetary consideration”.11
Vogel and Hayes have also maintained that Islamic law gives little
hope for the approval of options contracts. Rather than that, it poses a
series of objections of which an option requires payment for something
that is a mere intangible “right” (ḥ aqq) not property (māl) in the usual
sense (i.e. a tangible good or utility taken form a tangible good) as to
which alone compensation can be demanded. This is one basis for the
objection of some scholars that option price is unearned”.12 A similar
stand has been taken by other writers.13
Thus, given the above-mentioned facts, the present study will try to
discuss the different opinions on the issue from the different classical
sources of Islamic law in regard to whether a ḥ aqq is considered as
property or not and how, and to examine the positions of the different
schools of Islamic law. More importantly, since there is no specific verse
or ḥ adīth on the issue, we need to ascertain what the legal bases are for
the legality or prohibition of selling a pure right. At the same time, the
present study will try to identify the general principles of what should
be considered or not as a ḥ aqq mālī or a financial right in Islamic law
based on the treatment of previous Muslim scholars of the different
issues involving the exchange and sale of rights.
Thus, we look first into the concept of property or māl in the dif-
ferent schools of Islamic law and how the concept of property or māl
adopted by the early Ḥ anafī scholars is proven to be inconsistent and
11
El-Gārī, “Towards an Islamic Stock Market”, p. 13.
12
Vogel and Hayes, Islamic law and Finance, p. 164.
13
See for instance, Osman Babikir Ahmed, Islamic Financial Instruments to Manage
Short-Term Excess Liquidity Islamic Research and Training Institute Islamic Development
Bank, Jeddah Saudi Arabia, Research paper, no. 41, p. 30; Fuad al-Omar & Mohammed
Adel-Ḥ aqq, Isalmic Banking Theory, Practice & Challenges, Oxford University, 1996,
p. 92; Tariqullah Khān, Islamic Financial Derivatives, Discussion Forum, Islamic finance
net. P. 4; Obaidullah, “Financial Engineering with Islamic Options”, p. 76; ʿAbd al-Ḥ alim
Omar, al-Iqtiṣad al-Islāmī, p. 50.
consequently rejected by the later Ḥ anafīs or modified through the

introduction of many exceptions to it due to the change of custom. In
addition, we will briefly study the sale of khiyār al-sharṭ, the right of
shuf ʿah (pre-emption) and the inheritance of these rights. Besides, we
will look into other rights accepted as property or māl and their simi-
larities to the right to buy or to sell a conventional option. Thus, we will
examine badal al-khulu (or the right to sell the right of tenancy to a third
person), the sale of intellectual property (al-ʾIsm al-tijārī), al-nuzūl ʿan
al-wazāʿif (the right to sell one’s right to resign from a post in exchange
for financial remuneration or reward), the right to stop bargaining in a
specific commodity in exchange for money and similar cases.
It is worth noting that the issue of custom is at the center of the
debate on the sale of rights. Therefore, a brief account of custom and
maṣlaḥ ah as sources of Islamic law is necessary to lay down the legal
foundations for the sale of rights in general and the right to option in
particular.
Concept of Māl or Property
Three major schools of Islamic law, namely the Mālikī, Shāf ʿīs and
Ḥ anbalīs are of the opinion that usufructs or manāfiʿ are properties
or māl and could therefore, be subjected to contractual exchange
similar to physical property (ʿayn). Thus, the Shāf ʿī defined property as
what we can benefit from . . . whether it is corporeal (ʿayn) or usufruct
(manfaʿah).14 Similarly, al-Nawawī defined it as “everything that has a
benefit and therefore, could be exchanged”.15 Meanwhile, al-Suyūtī said,
“the title of property could be attributed to what has a value, could be
exchanged and, if one destroys it he will be held liable, however, little
it is and, people will not reject it”.16
Commenting on this definition, al-Duraynī said that it is clear from
this definition that custom is the basis for considering something as
property. Al-Suyūti has also said, “the title of property could be attrib-
uted to what has a value”. This means it has a value among people by
custom and becomes the subject matter of exchange. It is logical to
14
Al-Zarkashi, al-Qawāʿid, p. 343.
15
al-Nawawī, al-Majmūʿ, vol. 9, p. 345.
16
al-Suyuti, al-Ashbāh wa al-Nazāʿir, p. 97.
274 chapter eleven
say that everything which has value possessess manfaʿah that we could
benefit from, because anything which has no benefit would not have
a value and therefore, it is not a property and would be thrown away
by people. It could be understood from the above definition that the
concept of property includes all usufructs (manāfiʿ) and non-corporeal
property if it becomes a custom among people to sell it or transact
over it. On the other hand, if we realise that the value is the basis for
a thing to be a property or not and that the value would be based on
manfaʿah, we could conclude that manfaʿah is the basis of attributing
a value to something.17
Similarly, al-Shātị bī said: “property is anything which could be pos-
sessed and none could claim it from his owner unless by legal means”.18
Commenting on the above definition, al-Durainī said, the legal phi-
losophy of Imam al-Shātị bī regarding the concept of māl is based on
the fact that it is a legal attribute (ʾitibar, waṣf sharʿī) or the relation of
possession between the thing possessed and the possessor. Given that
this act of possession is approved by the sharīʿah, then it gives the pos-
sessor the right of taṣarruf or disposal in the object concerned . . . this
legal consideration is the basis for the concept of property in the Mālikī
school. It includes corporal and non-corporal property, usufruct and
all non-tangible property like “rights”, because all right are based on
possession and the substance of a right is ikhtiṣāṣ competence, power
and authority. The ikhtiṣāṣ is the substance of possession. Otherwise
such “rights” could not be considered rights in the strict sense of the
term but just ibāḥ āt and if the rights could be possessed, rights are
properties because property is synonymous with possession in the
Mālikī school.19
Property is also defined as “whatever has a value and could be sold
based on this characteristic and whoever destroys (ʾiʿtadāʾ alaihi) it
would be held liable”.20 In other world it is anything which has permis-
sible benefit like a house, camel, worm and larva for fishing . . . but any
thing which has no manfaʿah like an insect or has benefit but is prohib-
17
al-Duraynī, Buḥ ūth Muqāranah fi al-Fiqh al-Islāmi wa Uṣūlihi, Muʾassat al-Risālah
Beirut, 1994, vol. 2, p. 17.
18
Mohammad Ibn Ibrāhim al-Shātị bi, al-Muwāfaqāt, Matbaʿat al-Madani, Egypt,
1975, vol. 2, p. 17.
19
al-Duraynī, Buhūth Muqāranah fi al-Fiqh al-Islāmi wa Usulihi, vol. 2, pp. 23–25.
20
al-Suyūtī, al-Ashbāh wa al-Nazāʿir, Matbat Muṣtaphā al-Ḥ alabī, Egypt, p. 237;
Sharaf al-Dīn al-Maqdisī, al-Iqnāʿ, al-Matbʿah al-Azhariyyah, Cairo, vol. 2, p. 134.
ited by law like wine or allowed under necessity like a corpse or a thing
the possession of which would not be allowed unless under dire need
is not māl.21 It is clear that in the Ḥ anbalī school like the Mālikī and
Shāf ʿī the concept of property is not limited to corporeal property or
ʿayn since the corner stone is manfaʿah and not the corporeal aspect.
From these different definitions we could say, first of all, that māl is
anything which has a benefit and could be possessed. Therefore, anything
that has no benefit, like some kind of insect, is not māl. Secondly, the
manfaʿah in that thing should be a manfaʿah which is authorized by
the sharīʿah. Hence, the manfaʿah in alcohol could not be considered as
māl for a Muslim although it is a property for a non-Muslim. Thirdly,
the manfaʿah should not be authorized only by way of need like a dog
for a farmer for instance, or necessity like a corpse or maytah.
However, the early Ḥ anafīs defined māl as everything that could be
physically possessed and one could customarily benefit from.22 However,
Ibn ʿĀbidīn, one of the later Ḥ anafī jurists defined māl as everything
which has a value and could be valued by darāhim or danānir.23 From
this last definition, it is clear that the underlying characteristic of māl
for the later Ḥ anafīs, is the value, which could be assessed or valued in
terms of money. Hence, anything which has a value is māl and anything
which has value is manfaʿah and people would not be accustomed to
value something which has no benefit and would not be used as a sub-
ject matter of transaction.24 Thus, the concept of māl or property for
the early Muslim jurists includes all forms of rights, which have certain
benefits and to which people are accustomed. Consequently, the right
involved in options is a right, which has a benefit since it allows its
holder to manage his business risk and people are accustomed to this
fact. It has become widespread as a tool of risk management. Moreover,
it is not necessary that all people should be aware of this custom, since
the custom of traders in one city could be considered as a genuine
custom then, a custom, which is internationally recognized may also
be considered valid.
21
Ibn Qudāmah, al-Mughnī, vol. 5, p. 439.
22
Al-Sarakhsi, al-Mabṣūt, vol. 11, p. 78; Ibn Nujaym al-Ashbāḥ wa al-Nazāʾir, vol. 2,
p. 209.
23
Ibn ʿĀbidīn, Ḥ āshiyat Rad al-Muḥtār ʿalā al-Dur al-Mukhtār, Muṣtạ phā al-Ḥ alabī,
1966, Egypt, vol. 1, p. 11.
24
For more details see ʿAjīl Jāsim al-Nashmī, “Al-Huqūq al-Maʿnawiyyah Bayʿ al-ʾIsm
al-Tijāri’, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 5, vol. 3, 1988, pp. 2303–2309.
276 chapter eleven
Besides the fact that the general definition of property in the works
of early scholars includes rights, it is necessary to refer to some of the
cases legalized by Muslim jurists in which the subject matter of sale is
a right.
Haqq Al-Nuzūl ʿAn Al-Wazāʿif and the Sale of Rights
It is generally agreed in Islamic law that if someone has been appointed

to manage the awqāf property or to be Imām or muʾazzin in a mosque
built under awqāf, he has the right to stay in his post for as long as
he lives. At the same time, he has the right to relinquish this right and
resign at any time he wishes. The question is, is it lawful for him to
relinquish his right to another person in exchange for something, or in
exchange of a specific amount of money? In other words, is it possible
to exchange this right for some money?
Since the issue of exchange here is a right, the Ḥ anafī jurists have
different opinions. The early Ḥ anafī scholars considered it as pure
right and therefore, it could not be exchanged and if someone gives
some money to someone else in exchange for such a right, it would
be a kind of corruption. Ibn Nujaym, for instance, argues, “It is illegal
to exchange a pure rights like the right of shuf ʿah for something and
by way of analogy we could say it is illegal to exchange the right to
hold his post in the awqāf for something of value”. However, the late
Ḥ anafīs reversed this stand and considered it as legal based on the
custom prevailing at that time. However, Ibn ʿĀbidīn, one of the later
Ḥ anafī jurists, while endorsing the legality of exchanging such a right
with something, rejected the argument that such an exchange is based
on custom or that it is similar to the right of shuf ʿah. He argued that
the right of shuf ʿah is allowed by the sharīʿah to prevent harm, which
may be inflicted upon the owner of this right if an undesirable person
becomes his neighbour or his partner. However, such a right is different
from that of ḥ aq al-nuzūl ʿan al-wazāʿif. Therefore, the analogy between
the right for shuf ʿah and the right in ḥ aqq al-nuzūl ʿan al-wazāʿif is a
discrepant analogy. The right in the case of al-nuzūl ʿan al-wazāʿif, Ibn
ʿĀbidīn argues, is a right which has been acquired by its owner, as a
mater of principle and therefore, it is lawful to exchange it for some-
thing of value.
It seems that Ibn ʿĀbidīn has been forced to reverse Ibn Nujaym’s
analogy between ḥ aqq al-nuzūl ʿan al-wazāʿif and right of shuf ʿah
because he acknowledged that both rights were pure rights on one

hand, and on the other hand, the prevailing custom at his time neces-
sitated the permissibility of exchanging ḥ aqq al-nuzūl ʿan al-wazāʿif
and not that of shuf ʿah, therefore, he had to look for other grounds to
differentiate between the two rights. Thus, he argued that the right of
shuf ʿah is allowed by the sharī ʿah to prevent the harm which may be
inflicted on the owner of this right if an undesirable person becomes
his neighbour or his partner while such a right is not present in case
of ḥ aqq al-nuzūl ʿan al-wazāʿif. Importantly, Ibn ʿĀbidīn concludes his
analysis by saying “Overall, the issue is debatable and there is room for
research in analogous and similar cases in this regard.25 Besides, like the
later Ḥ anafīs, the legality of exchanging the right of ḥ aqq al-nuzūl ʿan
al-wazāʿif is also reported from other schools of Islamic law.26
The objective of this elaboration is to show that the subject matter of
the contract in the above exchange is a pure right but the major schools
of Islamic law accept it as legal. More importantly, the right in this
case is not related to the sale of any other property. Thus, al-Duraynī,
while criticising the Ḥ anafīs’ objection to the sale of other rights, asks
“how they have admitted the right in ḥ aqq al-nuzūl ʿan al-wazāʿif as a
right, which could be exchanged despite its weakness and rejected the
exchange of other rights obviously related to property”?27
Therefore, it could be said if such a right is admitted to be exchanged
although it is a pure right and not related to a property based on the
prevailing custom at that time, then, why could the right in option,
which is related to property not be exchanged? The right in ḥ aqq
al-nuzūl is admitted to be exchanged based on custom, because there
is no text to prohibit it and people were in need of it at that time.
Similarly, there is no text which prevents the exchange of the right in
option and people are in need of it nowadays and Muslim economists
acknowledge its benefits. Then, it could be concluded that it is lawful
to exchange the right in option on the grounds upon which the right
in ḥ aqq al-nuzūl is legalized.
25
Ibn ʿĀbidīn, Ḥ āshiyat Rad al-Muḥtār ʿalā al-Dur al-Mukhtār, vol. 4, p. 520.
26
See for instance, al-Mirdāwī, al-Insāf, vol. 6, p. 478; al-Buhūtī, Kashshāf al-Qināʿ, vol. 4,
p. 216; Sharḥ Muntahā al-Irādāt, vol. 2, p. 464; Mawāhib al-Jalīl, vol. 4, p. 224.
27
al-Duraynī, Buḥ ūth Muqāranah fi al-Fiqh al-Islāmī wa ʿUsūlihi, vol. 2, p. 56.
278 chapter eleven
Huqūq Al-Irtifāq and the Sale of Rights
Another aspect of the sale of rights accepted by Muslim jurists is the

rights of easements (irtifāq or huquq al-irtifāq). It is a right guaranteed
for the benefit of a house by the neighbouring house or by the owner
of a house to the owner of the adjacent house to pass through his
house for access, to let the water flow through it or to build a second
story on the roof of the first house. This right includes different types
of subsidiary rights such as:
1. The right of passage (ḥ aqq al-murūr): it is a right of passage guar-

anteed to the owner of a house who has no immediate access to the
road unless he crosses through the property of another person. In
other words, it is the right to pass through the property of another
person.
2. Right of flow (ḥ aqq al-masīl) or the right of the owner of a house
to the flow of water and rain water of his house through another
house. It should be noted that in both of the above cases, the prop-
erty at issue, through which the one who has the right of murūr or
masīl, is under the ownership of another person and, he has only
the right to pass in ḥ aqq al-murūr and right to let the water flow in
ḥ aqq al-masīl.
3. Ḥ aq al-shūrb or the right to have a share in a stream of running
water.
4. It includes also the right of taʿallī or the right of a person to build
a house over the house of another person if he gets this right by
buying it from the owner of the original house. By law, a person has
full right on what is above his house up to the sky and therefore, he
could give it or sell it to another person.
In short, we are not concerned here with the different legal implications
of these rights or their forms and categories or their usefulness in mod-
ern times. Our concern is just limited to the possibility of independently
selling these pure rights. And if the pure rights in ḥ uqūq al-irtifāq could
be sold, then why should there be any objection to the sale of the right
to option in conventional options trading on the ground that the subject
matter is a pure right?
The majority of Muslim scholars are of the opinion that these rights
of easement are rights related to property and therefore, they could
be sold. However, the Ḥ anafīs have some difference of opinion within
their school. They agree with the majority that these rights could be
sold if they are subordinated to physical property and not as indepen-
dent because these rights are pure rights or ḥ uquq mujarradah. While
some other Ḥ anafīs acknowledge that these rights could have a price
independently.
The following articles of the Majallah may reflect the practical neces-
sity of selling them separatly. First of all, article 216 stated that it is lawful
to sell the right of passage (ḥ aqq al-murūr), a right to take a portion
of running water (ḥ aqq al-shūrb) and the right to flow (ḥ aqq al-masīl)
as a part of selling the land itself as is the case of ḥ aqq al-murūr and
ḥ aqq al-masīl and the sale of water as subject to the water pipes and
not independently.
However, article 1168 stated, “when there is a house owned jointly
by two persons, and another person has a passage over it, if the owners
of the house decide to partition that house, the owner of the passage
could not prevent them. But when they have partitioned the house,
they should forgo the right of passage as it was before. And if, with the
consent of the three, the road is sold together with the house and if the
road is owned in common among the three, the price is divided among
the three. If the ownership of the road, subject to the right of passage,
belongs to the owner of the house and if the other person only has a
right of passing over it, everyone takes that of which he has a right.
Thus, the land with the right of way is valued first, and then it is valued
without the right of way. The excess of the one over the other of the two,
belongs to the man who has the right of way, the remainder, falls to the
owner of the house”. It is clear from this article, ʿAli Ḥ aydar argues that
the right of way or ḥ aqq al-murūr is given a separate price. As it has
been stated before, the issue is disputed in the Ḥ anafī school.28
What is important here is that despite the fact the right in ḥ uqūq
al-irtifāq is recognized as a pure right, it can be sold and this is the
opinion of the majority of Muslim jurists. Hence, the claim that the
right in options trading could not be exchanged because the subject
matter in options is a right is unfounded.
28
See Ali Haydar, Durār al-Ḥ ukkām Sharḥ Majallat al-Aḥ kām, Dār al-Kutub
al-ʿIlmiyyah Beirut, vol. 1, p. 165 & vol. 3, pp. 182–185.
280 chapter eleven
Badal Al-Khulu and the Sale of Rights
Another aspect of transaction, where the subject matter is a right, is

known in Islamic law as badal al-khulu. It is a sum of money paid by
a person to another in exchange for the transfer of his right to the
manfaʿah (usufruct) of a commercial place, which he has rented from
a third person. This kind of exchange has several forms.
Firstly, the owner of a specific land in the market, for instance, has
the intention to build a shopping complex on it but he does not have
enough money to implement the project. He contacted several persons
who have the intention to be the first person to rent the expected shops
or commercial places in this complex to provide him with the neces-
sary amount of money to undertake the project. However, when the
project is completed, they would be given the expected shops at a lower
rental than the prevailing rate and for a specific duration as it would
be agreed between the parties. In this example the owner of the place
is selling his right to rent the places to anyone he likes among those
who provided him with the necessary funds in exchange for their help.
For their part those who have provided the funds have provided them
in exchange for the benefit to use in the shop lots as agreed between
the parties. Moreover, they have full right to transfer or sell this right
to a third person during the agreed period with the real owner of the
place. What is important here is that such a transaction involves the
sale of a right and it is recognized by the different schools of Islamic
law including the Ḥ anafīs as a valid transaction.29
The second aspect of khulu is when the person who is staying at the
shop has lawfully acquired the khulu. Later on, the owner of the place
wants to use the place himself or for any other purpose during the period
of the tenancy agreement. The owner of the khulu has full right not to
vacate the place unless the owner of the place gives him something as
a price in order to relinquish his right of staying at the place until the
end of the agreed duration. For instance, he may have paid RM 1000
as price for the right to acquire the khulu at the beginning and now
the owner of the place wants to use the commercial place himself and
requests the owner of the khulu to vacate the place. The owner of the
khulu could ask now for RM 3000, for instance, from the owner of the
29
See Ibn ʿĀbidīn, Ḥ āshiyat Rad al-Muhtār ʿalā al-Dur al-Mukhtār, vol. 4, pp. 14–16,
al-Buhūti, Maṭālib ʾulī al-Nuhā, vol. 4, p. 370.
house in exchange for relinquishing his right to stay at the place until
the end of the agreed upon duration between the parties before.30
The third aspect of khulu is about a person who acquired the khulu
by legal means in the first place. He has a full right to sell his right of
khulu to any person and at whatever price he likes. Similar to this is the
case where a person has no khulu in the place; however, he has rented
it by legal means which would entitle him to sell his right to stay at the
place to a third person. For instance, a person has rented a commercial
place at RM 2000 per month for 12 months. After using the place for
seven months, for instance, a third person came and requested him to
rent him the place for the remaining 5 months. The one who has rented
the place at RM 2,000 per month could rent it to the third party at
RM 3,000 per month for the remaining 5 months of his initial period
and a third person could rent it from the second for three months, for
instance, at RM 3,500 per month. Here again the subject matter of the
transaction is not the commercial place itself, but the right to stay in it
for a specific period. In other words, the subject matter here is a pure
right but all schools of Islamic law consider it as a legal transaction.31
On the other hand, it should be noted that this kind of exchange has
no precedent in the early Islamic legal system. The first scholar, who gave
a fatwā, about the issue was Nāṣir al-Dīn al-Laqqānī from the Mālikī
school, on the grounds of prevailing custom in Egypt at that time since
the legality of such a transaction did not contradict any specific legal
text. Subsequently, the fatwā was adopted by other schools of Islamic
law32 including the Ḥ anafīs based on custom33 although according to
their general principles such a manfaʿah could not be sold because it
is a pure right.
Thus, if the right in badal al-khulu was admitted to be exchanged
based on custom and the general principles of Islamic commercial
30
For more detail see Mohammad Sulaimān al-Ashkhar, “badal al-khuluʿ”, Majallat
Majmaʿ al-Fiqh al-Islāmī, no. 4 vol. 3, pp. 2187–8
31
See for instance, al-Dasūqī, al-Sharḥ al-Kabīr, vol. 3, p. 467; al-Zurqānī, Sharḥ
al-Zurqānī ʿalā Khalīl, vol. 7, p. 75; al-Zuhailī, “badal al-khuluʿ”, Majallat Majmaʿ al-
Fiqh al-Islāmī, no. 4, vol. 3, pp. 2173–7; Ibrāhīm Fādil al-Dabū “Ḥ ukm al-sharīʿah fi
badal al-khulu, al-Sarfaqaliyyah”, Majallat Majma al-Fiqh al-Islāmī, no. 4, vol. 3, pp.
2199–2219; Muḥyī al-Dīn Qādī, “badal al-khulu fi al-fiqh al-Islāmī”, Majallat Majmaʿ
al-Fiqh al-Islāmī, no. 4, vol. 3, pp. 2223–2271; Muhammad ʿAli al-Taskhīrī, “badal al-
khulu wa Taṣḥīḥi”, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 4, vol. 3, pp. 2275–2279.
32
See al-Buhūtī, Matālib ulī al-Nuhā, vol. 4, p. 370.
33
See Ibn ʿĀbidīn, Ḥ āshiyat Rad al-Muḥtār ʿalā al-Dur al-Mukhtār, vol. 4, pp. 14–16.
Ibn Nujaym, al-Ashbāh wa al-Nazāʿir, pp. 113–114.
282 chapter eleven
law, even without any precedent in the works of previous scholars and
despite the fact that it is an exchange of rights, then why should there
be opposition to the sale of the right of option since there is no specific
text which prohibits the sale of rights in general or allows the sale of
certain rights and disallows the sale of others?
Moreover, it shows that the number of cases where a pure right could
be sold is not limited to what is reported from the early Muslim jurists
since there is no specific text from the Qurʾān or the ḥ adīth which limits
it. The whole issue is based on custom and public interest. It was on
these grounds that al-Laqqānī made his first fatwā regarding the right
of khulu, which was followed later by other jurists. Therefore, in mod-
ern times as well the legality of selling a pure right should be based on
custom and maslaḥ ah.
Sale and Exchange of the Right of Precedence
It is generally agreed that any person who has precedence in the use
of a plot of land which has not been used before by anyone by way of
developing it (ihyāʾ) has full right of ownership over it if he has been
able to make full use of it. However, if he did not develop it fully but
has just made taḥ jīr over it by marking the land with boundary stones
or wooden stakes, the clearing or burning of grass, enclosing the land,
digging a trench etc, he has only the right of precedence over the use
of this land and not the full right of ownership. Thus, unless he fails to
make full use of this land, no one has the right to challenge him in his
right of precedence or his possible right of ownership. This is based on
the saying of the Prophet (PBUH) “One who rehabilitates a barren land,
it is his, and there is no right of expropriation against him”.34 However,
it is quite possible that after getting the right of precedence over it, he
would like to sell it. Does he have the right to sell this right or exchange
it for something of value?
Muslim jurists have different views about the issue. Al-Ramly, for
instance, said whoever gets precedence over the use of some land and
has already erected some woods or assembled some dust on it and, he
is financially capable of making full use of the land and to rehabilitate
34
Sunan Abū Dawūd, Kitāb al-Kharāj, English translation, Aḥmad Ḥ assan Lahore,
Asraf press, 1984, vol. 2, p. 874.
it, he has the right of precedence over this land . . . however, the prevail-
ing opinion is that this right could not be sold or given as a gift; it is
like the right of shuf ʿah, as it is maintained by al-Māwardī. In contrast
al-Dārimī is of the opinion that such a right could be sold because there
is a full control of this right by the owner. Hence, it could be sold.35
Similarly, it is reported in Takmilat al-Majmūʿ that if someone
acquired a right of precedence over some land, he could transfer it to
another person and, if he dies, it could be inherited by his heirs as is
the case with the right of shuf ʿah. However, regarding the sale of such
a right, there are two opinions in the madhhab: that of Abū Ishāq is
that it could be sold because the owner has full control over it while
the prevailing opinion is that it could not be sold because it is similar
to the right of shuf ʿah.36
It thus appears that in the above case at least two leading Shāf ʿī
scholars, namely Abū Ishāq and al-Dārimī approve the legality of selling
such a right. A similar difference of opinion has been reported within
the Ḥ anbalī school where the prevailing opinion is that it could not be
sold while Abū al-Khattāb upheld the legality of selling such a right.37
Moreover, al-Buhūtī held that although the owner of such a right could
not sell it as it is the prevailing opinion in the madhhab, he could drop
it in exchange for something of value (al-nuzūl ʿanhu bi ʿiwad).38 From
the above, it is clear that the legality of selling the right of precedence is
disputed among Muslim scholars. Although its legality is upheld by the
minority; it seems that this opinion is in line with the general principles
and there is no specific text to prohibit it.
It was based on such an analysis and through the endorsement of
the opinion of the minority that murābaḥ ah lilʾāmir bi al-shirāʾ was
implemented. In other words, at the beginning it was very difficult for
Islamic banks to implement murābaḥ ah in its original form where the
promise between the Islamic bank and the customer should not be
binding and the customer shall have the full right to cancel the deal
as he wishes. It was a very risky transaction for the Islamic banks.
To solve the problem the opinion of Ibn Shubruma from the Mālikī
school that every promise is binding was adopted. Yet, it was discov-
ered later that some other jurists also shared this opinion although it
35
Al-Ramlī, Nihāyat al-Muhtāj, vol. 5, p. 336.
36
al-Mutīʿ, Takmilat al-Majmuʿ, vol. 14, p. 471.
37
See, al-Mirdāwī, al-Inṣāf fi Masʾīl al-Khilāf, vol. 6, pp. 373–374.
38
See, Al-Buhūtī, Sharḥ Muntahā al-ʾIrādāt, vol. 2, p. 464.
284 chapter eleven
still remained the opinion of the minority. What is argued here is that
it is a normal approach in Islamic law to endorse the opinion of the
minority as long as it is in line with the objective of the sharīʿah. The
fiqh literature is replete with cases of this nature. Therefore, if the right
of precedence, although a pure right, could be sold according to some
Muslim jurists, why not the right in option, which is also a pure right
related to a property?
Intellectual Property and the Sale of Right
Considering the fact that the sale of pure rights is based on custom
and maṣlaḥ ah, some modern Muslim jurists have accepted certain
contemporary issues involving the sale of rights on the above grounds.
For instance, the right to sell intellectual property is accepted by the
vast majority of contemporary Muslim jurists. What is important for us
here is the argument used to validate the sale of such rights. ʿAjīl Jāsim
al-Nashmī for instance, argues “since the right of intellectual property is
the result of intellectual and material efforts emanating from its owner
and has proportional presence in the material goods resulting from
that effort, it will be a source of competition for that good and give it a
reputation. This by consequence will fulfill the objective of the sharīʿah
by making available the best items for people’ consumption. This is a
maṣlaḥ ah recognized by the sharīʿah. And if people are accustomed to
prefer one kind of trademark to another this is like a maṣlaḥ ah based
on custom. And the maṣlaḥ ah is a usufruct and a usufruct is a prop-
erty according to the majority of Muslim scholars from the Mālikīs,
Shāf ʿīs, Ḥ anbalīs, the late-day Ḥ anafīs as well as the early Ḥ anafīs if
the transaction realises a maṣlaḥ ah to the people. Therefore, we can say
that intellectual property is a māl in Islamic law. And since the right in
intellectual property is a usufruct and a valuable property, it is a valid for
ownership because people are accustomed to consider it as a property
due to the benefit drawn from it. The right in intellectual property is
not the objective by itself but rather the manfaʿah resulting from it as it
is said by al-ʿIzz Ibn ʿAbd al-Salām “the usufruct is the main objective
of owning properties”.39
39
Al-ʿIzz Ibn ʿAbd al-Salām, Qawāʿid al-Aḥ kām, fi Maṣalīḥ al-ʾAnām, vol. 2, p. 17.
Therefore, Ajīl Jāsim al-Nashmī argues, if it is a custom that people

are exchanging intellectual properties, then it is a valuable property,
because people would not agree to exchange something, which has no
value. Property, as it is defined by al-Shāf ʿī, is that which has a value
and could be sold and if one destroys it, he would be held liable and
people are not throwing it away”. Therefore, a property is not just a
physical item, but it could be a usufruct, and at the same time a physical
item may not be considered as a property as in the case of wine for a
Muslim. Considering the above arguments, we can say confidently that
intellectual property is māl or usufruct on the one hand, and a right
on the other. Hence, rights are considered property if they originate in
property or are related to property.40
Similarly, Taqī al-ʿUsmānī, in his paper regarding intellectual property
concluded that “although intellectual property is a pure right, ḥ aqq
mujarrad, not attached to a material property, (after its registration by
the government which requires a lot of effort and gives it its legal aspect
through the certificate paper registered in the government records), it
becomes like the right associated and fixed in a material item. As such,
it becomes like an ʿain in the custom of traders. Therefore, it could be
exchanged by selling it”. There is no doubt that al-ʿUsmānī argues that
custom can transfer certain rights, from being abstract rights, to the
status of corporeal. And property, as Ibn ʿĀbidīn said, is what people
considered as property. This is like energy delivered from power or gas,
which was not considered as property before because it has have no
material or physical aspect, but it has now become a precious kind of
property and there is no doubt about the legality of buying and selling
it. This is because of its great benefit although the possibility of taking
it into possession is out of reach. However, people are accustomed to
the fact that it is a valuable property”.41 Al-ʿUsmānī continues his argu-
ment and says, by considering such a custom we are not contravening
any text or naṣṣ from the Qurʾān or the sunnah although it contravenes
the norms of qiyās or analogy. However, the norms of qiyās could be
overruled by custom, as it is explained in Islamic jurisprudence.42
40
ʿAjīl Jāsim al-Nashmī, “al-Ḥ uqūq al-Maʿnawiyyah, Bayʿ al-Ism al-Tijārī”, Majallat
Majmaʿ al-Fiqh al-Islāmī, 1988, no. 5, vol. 3, 2345–2346.
41
Muhammad Taqī al-ʿUsmānī, “Bayʿ al-Ḥ uqūq al-Mujarradah”, Majallat Majmaʿ
al-Fiqh al-Islāmī, 1988, no. 5, vol. 3, p. 2384.
42
Ibid., p. 2386.
286 chapter eleven
However, even the assumption that the sale of “rights” and usu-
fruct contravenes the norm of qiyās or analogy, as recorded by Taqī
al-ʿUsmānī, is only according to the Ḥ anafī school to which our scholar
is loyal. Thus, the investigation of some other contemporary Muslim
jurists like al-Duraynī that the sale and purchase of rights is in line with
qiyās and not against it according the majority of Muslim scholars.43
The practical result is that there is no limitation to make analogy, for
selling or exchanging a right, to the already existing cases of selling or
exchanging rights approved by the early scholars.
Even the concept of ḥ aqq mujarrad may not be applied to the kind
of rights discussed here if we consider Fathī al-Duraynī’s investigation
that a ḥ aqq mujarrad could not be disposed of in exchange for some-
thing and, therefore, those rights, which could be exchanged are not
ḥ aqq mujarrad.
On the other hand, commenting on al-Qarāfī’s opinion on intellectual
property (al-Qarāfīʾ is one of the rare classical scholars who discussed
the possibility of selling the right to ideas as he calls it ijtihādat. He
concludes that such a characteristic or right cannot be inherited because
it is a right related to the intention of the owner and his mind or ḥ aqq
mujarrad. Moreover, the ijtihād is a kind of ʿibādah and the ʿibādah
could not be sold). Al-Duraynī said, al-Qarāfīʾ has forgotten the dimen-
sion of ʿurf and value (qīmah) in the sale of such rights and since it
is recognized internationally that intellectual property has a value by
custom, then it could be considered as usufruct or a public interest or
maṣlaḥ ah and there is no evidence from the Qurʾān or the sunnah that
usufruct is not property. Moreover, there is no text which defines the
concept of māl or property in Islamic law. It is commonly known that
if juridical truth (al-ḥ aqīqah al-sharʿiyyah) is not present in the issue of
discussion we have to refer to customary truth (al-ḥ aqīqah al-ʿurfiyyah)
recognized by the people to serve their interests. When the Lawgiver
does not specifically mention something, He wants people to refer to
custom, because generally people’s transaction are based on interest and,
custom is based also on interest. Thus, although the right in intellectual
property is not something corporeal seen and to which we could point
out, the benefit in this right could be fulfillled through the place where
the right has settled . . . and we all know that among the characteristics
43
See, Fatḥ ī al-Duraynī, Buḥ ūth Muqāranah, fi al-Fiqh al-Islāmī wa ʿUsūlihi,
Muʾassasat al-Risālah, Beirut, 1994, vol. 2, p. 37.
of a right related to property one that it could be exchanged for money,

and one who destroys it will be held liable, and it could also be inher-
ited. Thus, it is clear that al-Qarāfīʾ has mistaken by considering such
a right, as a right that has no relation to property and, therefore, could
not be inherited. al-Duraynī continues his comment saying that the
above methodology has been applied by some jurists in their analysis
about the right of option or khiyār al-sharṭ. Those who consider it as an
intention and willingness have concluded that it cannot be inherited but
those who consider it as part of the contract say it can be inherited.44
Right to Option in Khiyār Al-Sharṭ and Right of Shuf ʿah or

Pre-Emption as Property Rights
ʿAbd al-Wahhāb Abū Sulaimān and ʿAbd al-Sattār Abū Qhuddah, in

their papers presented at the Islamic Fiqh Academy’s session on options
compared the right in conventional options with that of khiyār al-sharṭ
and concluded that the right in khiyār al-sharṭ is not a property right
(ḥ aqq mālī) and, therefore, it could not be inherited or exchanged45
while al-Ḍ arīr and al-Salami have quoted Ibn ʿĀbidīn’s statement that
a pure right, like the right in pre-emption, could be sold.
Before discussing the difference of opinion regarding the exchang-
ing or selling of these rights we have to look into the status of such a
right. Is it a right related to property (ḥ aqq mālī) or not? The issue is
generally tackled by Muslim jurists in connection with the possibility
of inheriting such a right.
Concerning the inheritance of the right of option in khiyār al-sharṭ,
the Mālikīs and Shāf ʿīs consider it lawful because such a right is a right
related to the benefit of a property and, therefore, it can be inherited.46
The Ḥ anafīs, on the other hand, maintained that such a right could not
be inherited because it is a kind of desire, opinion and willingness and
such willingness will no longer exist after the death of the beneficiary
44
See, Fathi al-Duraynī, Buḥ ūth Muqāranah, fi al-Fiqh al-Islāmī wa ʿUsūlihi, vol. 2,
pp. 45–6.
45
ʿAbd al-Wahhāb Abū Sulaimān, “al-Ikhtiyārāt” Majallat Majmaʿ al-Fiqh al-Islāmī,
no. 6, vol. 1, pp. 307–308; Abū Qhuddah, “al-Ikhtiyārāt”, Majallat Majmaʿ al-Fiqh
al-Islāmī, no. 6, vol. 1, p. 334.
46
See for instance, al-Nawawī, al-Majmūʿ, vol. 9, p. 222; al-Dasūqī, Sharḥ al-Dasūqī
ʿalā Muqtaṣar Khalīl, vol. 3, p. 102.
288 chapter eleven
of the option as is the case with his other attributes. Hence, the right
of option in khiyār al-sharṭ cannot be inherited.47
The Ḥ anbalīs have, on the other hand, considered such a right as
inheritable only if the beneficiary has claimed or requested the inheri-
tance of that right before his death, otherwise it cannot be inherited.48
This means that in principle such a right cannot be inherited unless
the beneficiary requests so. It could also be argued that in principle it
is inheritable on condition that the beneficiary requests it.49 However,
one may ask why the beneficiary of the option would not exercise it
himself rather than transfering it to his heir? The answer is that he may
want to push his right to option to the final limit of the agreed duration
before taking the decision of rescinding the contract or confirming it.
Therefore, he may transfer this right to his heir if he does not expect to
survive after a critical accident, for instance. This is because although
the right to option or the right to shuf ʿah are related to the intention
of the beneficiary, they have proprietary (māl) repercussions.50
It should be noted that the Ḥ anbalī jurists defended only the argument
that the right to option is not inheritable and no argument has been
advanced for the opinion that it could be inherited if the beneficiary
requested for it. Commenting on the Ḥ anbalīs’ opinion, Abū Ghud-
dah said, they (the Ḥ anbalīs) failed to produce any specific evidence
to substantiate their claim that this right could not be inherited except
the statement that “if the beneficiary requested, it could be inherited”.
This is a very weak argument, which does not call for discussion,51
because the request of a person would not make inheritable what is
not inheritable.
In his conclusion, Abū Ghuddah said the strongest opinion is that
the right of option is inheritable whether the beneficiary requests for
it before his death or not. This is due to the fact that besides the argu-
ment of those who consider such a right as inheritable, it is logical to
widen the scope of estate or tarikah so that it could include everything,
which has a great similarity with property, rather than to limit it. This
is because in principle everything left behind by the deceased person
47
al-Kāsānī, al-Badāʾiʿ, vol. 5, p. 264.
48
See for instance, Ibn Qudāmah, al-Mughnī, vol. 3, p. 518; Ibn Mufliḥ, al-Furūʿ,
vol. 4, p. 91.
49
ʿAbd al-Sattār Abū Qhuddah, al-Khiyār wa Atharuhu fi al-ʿUqūd, Dallah al-Barakah,
Jeddah, p. 321.
50
Ibid., p. 322.
51
Ibid., p. 323.
should be transferred to his heir with no exception. And this principle

should not be overruled except by virtue of undisputed evidence. More-
over, by looking to the right of option, and despite the fact that the
Ḥ anafīs consider it as an intention and desire, in fact it is a right related
to property like that of the option of defect and option of inspection,
because the objective of it is to obtain pecuniary benefit. On the other
hand, the right to option in khiyār al-sharṭ is different from the right to
option for a girl who has been married to someone, not by her father,
while she is still very young or under age, which is not a right related
to property. Moreover, even if we accept the argument that the right of
option of stipulation is just a personal attribute or characteristic of the
beneficiary, this attribute is closely related to property and it is natural
that the attributes related to property should be inherited. The transfer
of this right by inheritance is like the transfer of other rights agreed
upon by all scholars by ijmaʿ such as the right for the buyer to possess
what he bought; the right of price for the seller; or his right to ask for
a guarantee or collateral (rahan).52
Although the Ḥ anbalīs did not opt for the clear stand of the Mālikīs
and Shāf ʿīs and allow the inheritance of this right, by allowing its
inheritance after the request of the beneficiary, their approach shows
that they consider it a kind of property albeit not like other property.
This is because of the fact that for something to be inherited it should
be a property and since this right is inherited after the beneficiary’s
request, then it is property.
It should be noted here that some other rights related to the general
theory of khiyārāt in Islamic law and which are similar to the right
of option of stipulation have almost the same ruling and difference of
opinion among Muslim jurists. We have, for instance, the option of
specification (khiyār al-taʿyīn) where a person has bought one of differ-
ent commodities, say for instance, a car from a car dealer but did not
specify the colour of the car that he wants to choose but rather asked
for an option of taʿyin (choice) lasting for one week and suddenly he
died before the exercise of his right. Can this right be inherited or not?
Similar to this is the option of qabūl when a person has agreed to sell
something to another but the buyer asks for few days before giving his
answer of acceptance. Then if he dies before exercising his right could
this right be inherited?
52
Ibid., pp. 324–5.
290 chapter eleven
It is clear that the cause of dispute here is the concept of property

or māl. Those who consider rights as property allow it to be inherited,
while those who have the opposite opinion on rights disallow it from
being inherited.
Regarding the inheritance of the right of shuf ʿah the different schools
of Islamic law53 have taken a similar stand to that taken with regard
to khiyār al-sharṭ and almost the same line of argument was adopted.
Therefore, there is no need to elaborate on it, however, what is important
here is that, similar to the case of inheritance of the right of option, the
inheritance of the right of shuf ʿah is admitted by the Mālikīs, Shāf ʿīs and
partially by the Ḥ anbalīs. Therefore, if these rights could be inherited
because they are rights related to property, then, they could be exchanged
as well. Therefore, the right to option of stipulation or khiyār al-sharṭ
and the right to shuf ʿah could be exchanged. And if these rights could
be exchanged despite the fact that they are pure rights, then the right
to option in the conventional options trading could also be exchanged
although it is a pure right.
Sale and Exchange of the Right to Option in Khiyār Al-Sharṭ

and the Right to Pre-Emption or Shuf ʿah
Another generalization adopted by many contemporary Muslim jurists,

while addressing the sale of right and in particular in relation to con-
ventional options trading, is to quote Ibn ʿĀbidīn’s statement that “a
pure right such as the right of shuf ʿah could not be exchanged”. As a
result, since the right exchanged in the conventional option is similar to
that of shuf ʿah as a pure right, it could not be exchanged. A thorough
investigation shows that the legality of exchanging the right of shuf ʿah
is disputed among early Muslim jurists and there is no text from the
Qurʾān or the sunnah that shows that it is illegal to exchange such a
right. Yet, the majority of Muslim jurists consider it as illegal.54 However,
it is the norm in Islamic law that the opinion of the majority is not a
53
See for instance, Ibn Qudāmah, al-Mughnī, Maktabat al-Jumhiriyyah, Cairo, vol. 5,
p. 375; Ibn al-Humām, Sharḥ Fatḥ al-Qadīr, vol. 7, p. 446; al-Mirdāwi, al-Inṣāf, vol. 6,
p. 298; al-Shirāzī, al-Muhazzab, Dār al-Fikr, Beirut, vol. 2, p. 283; Ibn Rushd, Bidāyat
al-Mujtahid, Dār al-Fikr, vol. 2, p. 198.
54
al-Kāsānī, Badāʿi al-Ṣanāiʿ, Maktabat Zakariah Youssuf, Cairo, vol. 6, p. 2719;
al-Mirdāwī, al-Inṣāf fi Maʿrifat al-Rājih min al-Khilāf, vol. 6, p. 270; al-Shirāzī, Al-
Muhazzab, Dār al-Fikr, vol. 1, p. 280.
necessarily binding. In the absence of a clear text or naṣṣ the opinion

which is in line with maṣlaḥ ah and the general principles of the sharīʿah
should be followed. Therefore, an investigation is needed due to the need
in modern commercial transactions for the sale of rights.
Thus, the majority of Muslim scholars are of the opinion that the
right of shuf ʿah cannot be exchanged. Because such a right is allowed
in principle to prevent a harm or ḍarar, which may be inflicted on the
beneficiary of the right of shuf ʿah whether either due to the presence
of a disliked (troublesome) neighbour or to any other harm related to
neighbourhood. Therefore, by requesting an exchange for the transfer
of this right to a third person, it is clear that the beneficiary will not be
suffering any harm from this deal and as a result he should be prevented
from making profit from this right. However, the Mālikīs did not see
any objection in selling this right after receiving it, because it is an
established right, then, it could be exchanged like any other right.55 This
opinion has also been reported from Abū Ishāq Ibrāhīm Ibn Aḥmad
al-Mirwazī, one of the leading Shāf ʿī scholars.56 So, to claim that a pure
right like the right of shuf ʿah cannot be exchanged is just the opinion
of some scholars while others consider it as a right, which can be sold.
Therefore, the argument, that the right of option is similar to that of
shuf ʿah, and since the right of shuf ʿah cannot be exchanged, the right
of option also cannot be exchanged is unfounded. In contrast, it will
be argued that the right of option in the conventional option trading is
similar to the right of shuf ʿah, which can exchanged according to the
Mālikī school and Abū Isḥāq Ibrāhīm Ibn Aḥmad al-Mirwazī from the
Shāf ʿī school, then, the right to option in the conventional options can
be exchanged. Moreover, it is not only the opinion of some Muslim
jurists, but it is also in line with the general principle that all things,
including contracts and conditions, are permissible and, there is no
text from the Qurʾān and sunnah to prohibit the sale of such right.
Therefore, it is incumbent upon those who prohibit the sale of such a
right to provide the evidence.
A similar case concerning the sale of rights is the possibility of selling
or exchanging the right to cancel the contract or to ratify it in khiyār
55
Imām Mālik, al-Mudawwah al-Kubrā, Dār al-Fikr Beirut, vol. 4, p. 216; Ḥ āshiyat
al-Ruhuni ʿalā al-Zurqānī, Dār al-Fikr, Beirut, vol. 6, p. 264; al-Mawwāq, al-Tāj wa
al-Iklīl, with Mawāhib al-Jalīl, vol. 5, p. 318.
56
See Al-Nawawī, Rawḍat al-Ṭ ālibīn wa ʿUddat al-Muttaqīn, al-Maktab al-Islāmī
Beirut, vol. 5, p. 111.
292 chapter eleven
al-sharṭ (option of stipulation). The general prevailing opinion is that

such a right cannot be exchanged. Al-Ḍ arīr, for instance, after com-
paring khiyār al-sharṭ with option, said “although option is somehow
similar to khiyār al-sharṭ, there are fundamental differences between
the two types of sale. Thus, the option in khiyār al-sharṭ is part of the
contract, while it is totally a separate matter in conventional contracts.
Moreover, al-Ḍ arīr argues that he did not come across the opinion
of any early scholar allowing pecuniary exchange with the option in
khiyār al-sharṭ.57
However, although the general opinion is not in favor of exchang-
ing such a right, we have come across a Ḥ anafī fatwā allowing such an
exchange. It is reported in al-Fatāwā al-Hindiyyah and Fatāwā Qādi
Khān that “if a person sells a house to another with an option of stipula-
tion or khiyār al-sharṭ for three days, then the buyer requests the seller to
drop his right for option in exchange for a specific amount of money or
a specific commodity, such a transaction is legal and the amount added
would be considered as an increase in the price of the house. Similarly,
if the option is in favor of the buyer and the seller requests him to drop
his right for option and confirms the contract, the transaction is legal
and it will be a deduction from the initial price.”58
From the above fatwā, it can be noted that the exchange of such a
right is allowed by scholars from the Ḥ anafī school which did not con-
sider such a right as a right related to property. So, it could be said that
although the Ḥ anafīs did not consider such a right as a right related to
property and therefore, it could not be exchanged, this will be part of
the many exceptions they have made to their general principles about
the exchange of rights, as is the case of ḥ aqq al-nuzūl ʿan al-wazāʿif
or huquqq al-irtifāq based on custom and the need of people for such
transactions. Hence, it is quite possible that the Ḥ anafī scholars who
allowed the exchange of the right of option in khiyār al-sharṭ based their
opinion on custom and the need for such an exchange.
A similar analysis was made by ʿAbd al-Raḥmān al-Saʿdī, a promi-
nent modern Ḥ anbalī scholars, while addressing the issue of ṣulḥ or
reconciliation to drop one’s right in pre-emption or shuf ʿah and the
57
Ṣiddīq al-Ḍ arīr, “al-Ikhtiyārāt”, Majallat Majmaʿ al-Fiqh al-Islāmī, no. 6, vol. 1,
p. 263.
58
al-Fatāwā al-Hindiyyah, Dār ʾIhyāʾ al-Turāth al-ʿArabī, Beirut, 1986, vol. 3, p. 45;
Fatāwā Qādī Khān, Mawlawi Niyaz Muhammmad Kuwanti, Bulishistan, 1985, vol. 2,
p. 371.
right of option of stipulation or khiyār al-sharṭ in exchange for money.

He stressed that the ḥ adīth of the prophet that, “ṣulḥ or reconciliation
among Muslims is legal unless it prohibits what is allowed or permits
what is prohibited by the sharīʾah is general to any kind of ṣulḥ as long as
it does not include something prohibited, ribā and does not contravene
an obligation or wājib. To drop one’s right in pre-emption or shuf ʿah or
right of option of stipulation or khiyār al-sharṭ in exchange for money
is similar to that. And their argument (the early Ḥ anbalīs) that these
rights are not legalized for financial benefit is true, but a person may
accept to drop or relinquish his right in pre-emption or shuf ʿah and the
right of option of stipulation or khiyār al-sharṭ in exchange for money
and he may not agree to relinquish his right without that . . . and such an
exchange is in line with the general principles and there is no explicit
evidence which prohibits its exchange.59
Similarly, ʿAli al-Khafīf, while touching on the different opinions
about the sale of right of pre-emption or shuf ʿah, maintained that the
majority disallows its sale while many scholars of the Mālikī school
consider it lawful. Then he commented after the Mālikī opinion say-
ing “there is no doubt this is clear (in its argument) while the Ḥ anafī
opinion that such a right could not be sold is questionable”.60 This is
despite the fact that ʿAli al-Khafīf, is generally influenced by the Ḥ anafī’s
school in his writing.
More importantly, if we apply the principles adopted by the Mālikīs
and the Shāf ʿīs that the right of option in khiyār al-sharṭ and the right
in pre-emption or shuf ʿah is a right related to property as we have
already explained, we could say that to allow exchange of a such right
for money or property when there is a need for such an exchange is
in line with the principles adopted by the Mālikīs and Shāf ʿīs in this
regard. Although we did not come across an explicit opinion from the
two schools on the matter, this does not mean it is against the principles
of these two schools. It could also be argued that probably the exchange
of such a right was not a custom in the Mālikī and Shāf ʿī dominated
areas at the time of early Muslim jurists and not because it is against
the general principles of the two schools. And if some scholars from
59
See, ʿAbd al-Raḥmān bin Nāṣir al-Saʿdī, al-Mukhtārāt al-Jaliyyah min al-Masāʾil
al-Fiqhiyyah, al-Riʾāsah al-ʿĀmmah li Idārāt al-Buḥūth al-ʿIlmiyyah wa al-Daʿwah wa
al-Irshād, Saudi Arabia, 1985, p. 148.
60
ʿAli al-Khafīf Aḥ kām al-Muʿamalāt al-Sharʿiyyah, Dār al-Fikr al-ʿArabī, Cairo,
1996, vol. 3, pp. 171–172.
294 chapter eleven
the two more conservative schools, namely the Ḥ anafī and Ḥ anbalī
schools, regarding the issue of considering the right of option and the
right of pre-emption as rights related to property, allow the exchange
of such rights for money, then to allow such an exchange based on the
principles of the Mālikīs and Shāf ʿīs is much clearer.
Thus, we can say: to exchange a pure right such as the right in option
of khiyār al-sharṭ is in line with sharīʿah principles because it is a right
related to property. Hence, there are no legal grounds to invalidate
the exchange or the sale of option in conventional options contracts
because options are similar to khiyār al-sharṭ and since the option in
khiyār al-sharṭ cannot be exchanged, it will be so with the right in
conventional options.
Exchange of Right to Bargain for Purchase of Commodity
In a similar approach to the preceding cases, the Mālikīs allow exchange

of one’s right to bargain with others in the purchase of a specific com-
modity in exchange for money. Thus, when two persons, for instance,
are bargaining for the purchase of a specific commodity and one of
them requests the other to stop bargaining with him in exchange for
two dīnārs, or offers him, for instance, the opportunity to be his partner
in the ownership of the commodity, the one who stops bargaining has
full right to get this money, whether the contract has been concluded
with the commodity’s owner or not. The same ruling according to the
Mālikīs can also be applied to a situation where some people are con-
testing for the marriage of a woman or getting a specific job and one
of them requests the other to stop competing with him in exchange for
some money.61 The above cases show once again that a pure right could
be exchanged with money and there is nothing, which prohibits that.
Besides the above cases of rights, which can be bought and sold,
there are a number of rights which cannot be bought and sold naturally,
however, they can be dropped in exchange for something. Although
dropping is not hundred per cent selling, it shares its meaning. That
is why some jurists have even used the term selling in its figurative
61
See al-Dasūqī, Ḥ āshiyat al-Dasūqī ʿalā al-Sharḥ al-Kabīr, Dār ʿIhyāʾ al-Kutub
al-ʿArabiyyah, Cairo, vol. 3, p. 68; al-Ḥ attāb, Mawāhīb al-Jalīl Li-Sharḥ Mukhtaṣar Khalīl,
Dār al-Fikr, vol. 2, p. 378; Al-Khirshī ʿalā Mukhtaṣar Khalīl, Dār al-Fikr, vol. 5, p. 83;
Muhammad ʿUleish, Sharḥ Minaḥ al-Jalīl ʿalā Mukhtaṣar Khalīl, vol. 2, p. 573.
sense. What is important is that a pure right can be sold or dropped

in exchange for money.
Sale of a Right By a Wife To Have Her Husband With Her
In line with the previous difference of opinion in considering what

rights can or cannot be exchanged for, the majority of scholars consider
it illegal for a woman who is sharing a husband with another woman
(under a polygamy system) to exchange her right of having her husband
with her for money so that he could be with his second wife. However,
the Mālikīs maintain that the husband of three wives for instance, can
buy (the expression used by ʿUlesh but in realty the right is dropped
but the term “buy” is used in a figurative sense) “the day (s)” of one
of his wives and give it to whom he likes. But ʿUlesh added the dura-
tion should not be too long for fear of gharar. It should be noted that
considering the fact that Islam allows polygamy, a polygamist should
divide his nights among his wives in a just and fair manner, two nights
with each one of them for instance. However, the Mālikīs allow such a
right to be dropped in exchange for money.62 Similarly, Ibn Taymiyyah
argues that by analogy to similar cases adopted in the Ḥ anbalī school,
such a right could be exchanged like other rights.63 Once again this is
a case where a pure right is exchanged for money in confirmation to
the maintained hypothesis that the exchange or sale of rights is in line
with the general principles of Islamic law.
Earning an Exchange For Waiving the Right To Hadānah
It is possible to waive the right to ḥ adānah in exchange for money in

the Ḥ anafī and Mālikī schools because it is an established right and
therefore, its owner can make use of it. For instance, if a women wants
to make khulʿ (divorce in return for a monetary compensation to be
paid by the wife to the husband) from her husband from whom she
has already a child and she does not possess the necessary amount of
money to pay for the khuluʿ, she can waive her right to ḥ adānah or
62
ʿUlesh, Sharḥ Minaḥ al-Jalīl ʿalā Mukhtaṣar Khalīl, Dār Sādir, vol. 2, p. 174.
63
See, al-Buhūtī, Kashshāf al-Qināʿ, vol. 5, p. 206.
296 chapter eleven
custody of her child after the divorce in exchange for getting the khulʿ
from her husband.64 It should be noted however, that even those who
have argued against such an exchange maintained that the right to
custody does not belong to the mother as it is maintained by the first
group but rather to the child, and therefore, the mother could not drop
it in exchange of something.
Earning an Exchange For Waiving a Right
There is a difference of opinion among the different schools of Islamic

law concerning the right to recover one’s gift after giving it to someone.
The Ḥ anafīs are of the opinion that the gift donor has the right to get
it back. The gift receiver, according to the Ḥ anafīs, can give the gift
donor something in exchange for dropping his right to get back to his
gift.65 It could be argued here that what the gift receiver gives to the
gift donor in order to drop his right to recover his gift is, in fact, the
cost of the item given as a gift. But such an assumption will be correct
if the parties concerned are considering it a price for the item given or
in exchange for dropping the right to recover the gift. Thus, if it is a
price, it would be generally according to the market price of the item.
But if it is in exchange for dropping the right, a trivial amount might
be enough. More importantly, the case is discussed by the jurists as
a case of dropping a right in exchange of something and this is our
concern here. The above case shows once again that a pure right can
be exchanged. Even if it is physically impossible to buy or to sell such
a right, it could be dropped in exchange for something.
From the above analysis of the concept of right (ḥ aqq) or the concept
of usufruct (manfaʿah), it is clear that the majority of Muslim scholars
maintain that a pure right could be property. This is the stand of three
major schools of Islamic law, namely the Mālikīs the Shāf ʿīs, and the
Ḥ anbalīs. On the other hand, the early Ḥ anafīs did not consider such
64
Ulesh Sharḥ Minaḥ al-Jalīl ʿalā Mukhtaṣar Khalīl, Dār Ṣādir, vol. 2, pp. 184–5;
Ḥ āsiyat Qurrat ʿUyūn al-Akhbār Takmilat Rad al-Mukhtār ʿalā al-Dur al-Muhtār, Dār
al-Kutub al-ʿIlmiyyah, Beirut, 1994, vol. 5, p. 254.
65
Ḥ āsiyat Qurrat ʿUyūn al-Akhbār Takmilat Rad al-Mukhtār ʿalā al-Dur al-Muhtār,
pp. 631–638.
rights as property unless they are related to corporeal property such as

ḥ aqq al-murūr, ḥ aqq al-shurb, ḥ aqq al-masīl and ḥ aqq al-taʿallī.
However, the later Ḥ anafīs, due to practical pressure, have totally
reversed the situation and joined the majority by adopting the approach
of exception in order to maintain their early principles that a pure
right could not be bought or sold. They conceded that some ḥ uquq
mujarradah could be considered as property. Thus, they admitted that
ḥ aq al-nuzūl ʿan al-wazāʿif and badal al-khuluʿ despite being a pure
right, could be exchanged for money. Moreover, some modern jurists
such as Taqī al-ʿUsmānī influenced by the Ḥ anafī school admitted that
although intellectual property is a pure right, ḥ aqq mujarrad, not fixed
in a material property, after its registration by the government which
requires a lot of effort to give it its legal aspect through the certificate
paper registered in the government records, it becomes like the right
associated and fixed in a material item. Some Ḥ anafīs went further by
allowing the right of option in khiyār al-sharṭ to be dropped in exchange
for something as it is endorsed by Qādī Khān.
Concerning the inheritance of certain rights considered to be pure
rights or ḥ uqūq mujarradah, such as the right of stipulation in khiyār
al-sharṭ or the right of shuf ʿah, the majority of Muslim scholars main-
tained that these rights are inheritable because they are rights related
to property ḥ uqūq māliyyah. It is logical to argue that these rights are
inherited because they are ḥ uqūq māliyyah and hence, they could also
be exchanged.
Yet, as we have discussed early, Qādi Khān has reported the per-
missibility of dropping such right in exchange of something despite
the unpromising Ḥ anafī stand on the sale of rights. Similarly, ʿAbd
al-Raḥmān al-Saʿdī preferred the opinion that the right of option of
stipulation and the right of pre-emption can be exchanged. Therefore,
it can be argued why similar rights are not allowed to be bought and
sold, if there is a need for such transaction, in our time in the form of
conventional options at least in the primary market?
On the other hand, even those rights, which cannot be bought and
sold due to their nature, can be dropped in exchange of something.
Thus, it is possible to exchange one’s right to bargain for the purchase
of a commodity with some money; for a woman to exchange her right
to have her husband with her on her tour; to exchange her right to
ḥ adānah or custody in order to get khulʿ divorce; or for someone to drop
his right to hold back his gift in exchange for something of value.
298 chapter eleven
There is nothing in sharīʿah that prevents a pure right from being

the subject matter of a contract if people are accustomed to it and if
such an exchange does not lead to any infringement of other principles
of sharīʿah.
More importantly, given the fact that there is no single legal text which
prohibits a pure right from being the subject matter of a contract, we
may easily resort to the principle that all contracts and conditions are
permissible or al-ʿAsl fi al-ʾashyāʾ al-Ibāḥ a and it is therefore, incumbent
upon those who prohibit the sale of right, as it is in the conventional
options contracts, to produce the textual evidence that prohibits it. And
the text, which prohibits some thing, should be an explicit text without
any doubt about it.
Furthermore, a close look at some of the already proven pure rights
that could be the subject matter of a contract and the argument of their
legality advanced by the scholars shows that their argument is based on
custom. Thus, the legality of al-nuzūl ʿan al-wazāʿif, badal al-khulu or
the permissibility to drop one’s right in khiyār al-sharṭ in exchange of
something is based on custom. Similarly, some contemporary scholars,
who argued for the legality of intellectual property, based their argument
on the principle of custom. Thus, as al-Duraynī put it “for a right to
be related to property and by consequence can be exchanged two basic
elements are required: value and custom”. Therefore, the right of option
in the conventional system is without any doubt a right, which has a
value due to its benefit. This is a reality internationally recognized by
market participants and become like a specific custom or ʿurf khāṣ. Yet
the ʿurf khāṣ is recognized by Muslim jurists as a source of evidence
in the absence of a legal text. Therefore, it is not necessary a transac-
tion should be based on a custom that is prevailing in all markets. It is
enough that it is recognized in some markets. It should be noted that
even the custom of one-city traders is a valid custom. Thus, al-Laqqānī
for instance, based his fatwā on badal al-khuku on the prevailing cus-
tom of Cairo.
CONCLUSION
The study on derivatives instruments shows that the admission of

derivatives contracts in Islamic finance depends fundamentally on the
type of contract used, the subject matter of the contract and the way
they are traded. Therefore, totally rejecting or accepting these novel
strategies of risk management will be wrong. Despite the fact almost
all derivatives instruments are totally new to Islamic financial law, the
possibility of admitting some these instruments or finding the suitable
alternative for others is very high.
Thus, it is submitted in this study that the forward, futures and options
contracts in currencies, interest rate and stock indices are not permis-
sible in Islamic law due to the clear involvement of ribā or excessive
risk which is a form of gharar.
Meanwhile, the accommodation of derivatives contracts in shares
trading and especially in commodities into Islamic law does contradict
any genuine text. However, the issue has been generally marred, so
far, by the methodology which seeks to establish for any new issue, a
precedent in the prevalent classical interpretations of Islamic law while
totally disregarding any other opinion even if it does not contradict any
genuine text and more importantly even if it constitutes the view of
some early Muslim jurists. The issue is also affected by the disregard of
some fundamental jurisprudential principles such as the issue of taʿlīl
recognized by the majority of Muslim scholars as the norm in the area
of muʿamalāt.
This methodology is reflected in the latest resolution of the Islamic
Fiqh Academy no. 107 (1/12) 23–28 September 2000 which maintained
in its rejection of the forward contract in commodity that “if the subject
matter in the forward contract is a commodity that need manufactur-
ing, the transaction must fulfilll the conditions of ʿistiṣnāʿ. If does not
need manufacturing, then the price must be paid in the spot and the
transaction must fulfilll the conditions of salam. However, if the price
is not paid at the spot, the transaction will be illegal because it is a
kind of bayʿ al-kāliʾ bi al-kāliʾ. On the other hand, if the transaction is
just a promise and not binding upon either parties or at least one of
300 conclusion
them, it will be permissible.”1 Similar resolution has been adopted by

the seventeenth al-Barakah forum, in December 19992 disregarding the
great need for this contract by Muslim businessmen and the different
grounds that may constitute a valid foundation for the legality of this
contract.
It is maintained in the present study that the forward contract in
commodities, in particular, is a permissible contract since it does not
contradict any clear text of the sharīʿah and there is a general need
for it either by individual businessmen, companies or even by govern-
ments. Moreover, it is clear that the rejection of this contract by many
contemporary Muslim jurists on the grounds that it contradict the
“ḥ adīth” about bayʿ al-kāliʾ bi al-kāliʾ, the ijmāʿ which is believed to
have materialized upon this “ḥ adīth” or the principle “do no not sell
what is not with you” are all weak arguments as explained.
This is because the ḥ adīth is unanimously agreed that it is a weak
ḥ adīth and therefore, could not be a genuine evidence. Regarding the
ijmāʿ it is unanimously agreed that not all form of sale of debt for debt
are illegal or ḥ arām, therefore, even if we admit the existence of an ijmāʿ
regarding the prohibition of the sale of debt for debt it would definitely
include only some forms of sale of debt for debt and not all. However,
there are different opinions about what kind of sale of debt for debt is
covered by this ijmāʿ. And it is the principle in Islamic jurisprudence
that whenever specific evidence is doubtful it shall be rejected al-dalīl
idha taṭarraqaʾilaihi al-iḥ timāl saqata bihi al-istidlāl. Therefore, it is
submitted that even if we accept the existence of an ijmāʿ it would be
limited only to cases of sale of debt for debt involving ribā or exces-
sive gharar which are definitely not present in case of the conventional
forward contract.
On the other hand, it is submitted that the claim that there is no
benefit in such contract is unwarranted. It is an established fact nowa-
days that the forward contract represents the backbone of contemporary
international trade and no country or company can ignore its impor-
tance in managing its businesses.
Ironically, many contemporary scholars have admitted the legality
of istiṣnāʿ where both countervalues are deferred, typically as it is the
1
See Dallah al-Barakah Hawliyyat al-Barakah, al-Barakah Investment and Devel-
opment Company General Secretariat, Unified Sharʿīah Board, issue no. 2, December
2000, p. 290.
2
Ibid., p. 274.
conclusion 301
case in the conventional forward contract based on istiḥ sān and need
but rejected the conventional forward contract. Perhaps for the simple
reason that istiṣnāʿ is admitted by the early ḥ anafī jurists while the
conventional forward contract is not. However, it is submitted that if
these contemporary Muslim jurists have opted for the legality of istiṣnāʿ
based on the ḥanafī’s opinion and, putted aside the opinion of the three
other schools which regard istiṣnāʿ as an illegal contract, due to the need
for such an independent contract in contemporary business, they have
to accept, similarly, the legality of the conventional forward contract
which has the same legal characteristics as istiṣnāʿ and which is much
needed today than istiṣnāʿ itself.
In a similar approach some scholars accepted the permissibility of
deferring of the price of salam for three days as it is the stand in the
Mālikī school or even more than that due to contemporary practical
constrain, but rejected the permissibility of deferring the price in the
forward contact. It is submitted that if it is permissible to defer the price
of salam for three days, more or less there is no reason for not applying
the same principles with regard to the forward contract.
The main alternative advanced by the opponent for the conventional
forward and futures contracts is the salam contract. However, it is clearly
articulated by a number of honest Muslim economists that salam could
not solve these problems and there is a genuine need for the forward
contract. Therefore, insisting on salam as the only alternative to con-
ventional forward contract means putting Muslim businessmen in a
disadvantageous position without genuine reason which may encour-
aging them to invest their wealth in foreign financial institutions for
better management and planning even if that will lead sometimes to a
clear contradiction with the principles of Islamic law.
Some commentators have proposed the concept of al-waʿd (promise)
which shall be binding on both parties. However, it is clear that if the
promise is binding on both parties, it would be a clear forward contact
despite the theoretical differences advanced by the proponent of this
argument. Therefore, it is submitted that the conventional forward
contract in commodities is a genuinely needed contract. Hence, it is a
valid contract because there is no genuine text to prohibit it. Moreover,
it is an established principle in Islamic law that prohibition could only
be established by means of decisive evidence which is not the case with
the forward contact.
Similarly, it is maintained that the forward contract could be based on
bayʿ al-ṣifah or sale by description especially its concept in the Mālikī’s
302 conclusion
school where it is possible to defer both countrevalues if the subject

matter of the contract is well defined.
Despite the fact that the majority of contemporary Muslim scholars
are still opposed to the forward contract, the admission of the forward
contract into Islamic law is gaining slowly momentum. Thus, we have
seen some scholars, who are members of the Islamic Fiqh Academy and
regular participants of al-Barakah forum such as Mukhtār al-Salāmī,3
Rafīq al-Masrī,4 Hasan al-Jawāhirī5 Muhammad ʿAli al-Taskhīrī,6 accept-
ing this contract and rejecting the claim that it is a kind of prohibited
sale of debt for debt, the sale of nonexistent, a sale of gharar or a sale
without benefit.
Meanwhile ʿAbd al-Wahhāb Abū Sulaimān7 and Aḥmad ʿAli ʿAbd
Allāh8 admitted it by analogy to bayʿ al-ṣifah while others such as Nazīh
Ḥ ammād adopted it into Islamic law under the rules of ḍarūrah or
necessity. Ṣiddīq al-Ḍ arīr9 on the other hand although he maintained
that the forward contract is not governed by the concept of sale of debt
for debt and does not involve gharar, and it does not involve the sale of
nonexistent, yet he abstained from upholding its permissibility for the
simple reason that such an opinion will oppose the majority’s stand as
it is elaborated earlier.
Regarding trading gold on a forward basis it is maintained that the
different approaches taken so far to address the issue are less than
convincing. Thus, the present study critically analyzed the opinion that
trading gold in exchange of paper money in deferred basis is permis-
sible because paper money are not currencies but a commodities and
therefore, there is no case of money exchange or ṣarf. Such a stand has
3
Mukhtār al-Salāmī, “Taʾjīl al-Badalayn Fi al-ʿUqūd”, Nadwat al-Barakah al-Tāsiʿah
ʿAsharah lil Iqtiṣād al-Islāmī Makkah al-Mukarrah 7–8 Ramadān 1421H, December
2–3, 2000.
4
Rafīq al-Maṣrī, Munāqaṣāt al-ʿUqūd al-Idāriyyah, Dār al-Maktabī, Damascus,
1999.
5
Ḥ asan al-Jawāhirī ʿUqūd al-Tawrīd wa al-Munāqaṣāt paper presented to the twelve
session of the Islamic Fiqh Academy, Rabat-Morocco. Also see the discussion regarding
ʿUqūd al-Munāqasāt Majallat Majmaʿ al-Fiqh al-Islāmī, no. 9, vol. 2, pp. 308–309.
6
Majallat Majmaʿ al-Fiqh al-Islāmī, no. 9, vol. 2, pp. 297–306.
7
ʿAbd al-Wahhāb Abū Sulaimān, ʿAqd al-Tawrīd Dirāsah Fiqhiyyahh Taḥ līliyyah,
paper presented to the twelve session of the Islamic Fiqh Academy, Rabat-Morocco.
8
See, Aḥmad ʿAli ʿAbd Allāh, “al-Bayʿ ala al-Ṣifah” paper presented in Nadwat Bnak
al-Shamāl litaʿṣil al-ʿAmal al-Maṣrafī, 20–21 June 1997.
9
See, Majallat Majma al-Fiqh al-Islāmī, no. 9, vol. 2, pp. 325–333.
conclusion 303
no touch with reality because paper money are the real medium of
exchange and store of value nowadays and not commodities.
Similarly it is maintained that it is inappropriate to consider paper
money like fulūs used in Islamic history and which are considered by
the majority of scholars as not having the characteristics of gold as a
store of value and medium of exchange. It is also submitted that it is
inappropriate to ignore the present day reality that gold is no longer
the medium of exchange and store of value as it is used to be before.
It is inconceivable to admit that the ʿillah or the ratio behind the pro-
hibition of exchanging gold and silver unless they are hand to hand is
that they are the medium of exchange or mutlaq al-thamaniyyah and
to ignore the effect of this ʿillah when it is almost not present, as is the
case nowadays, and to insist that gold and silver are currencies by cre-
ation without any legal basis. Yet, the present study acknowledges the
complexity and sensitivity of the issue and calls for a collective ijtihād
to resolve this issue. Nevertheless, the concept of promise to sell gold
followed by a contract to confirm it during delivery time can be accepted
as a temporary solution for gold trading.
On the other hand, arguing for the legality of the forward contract
in commodities does not mean any new transaction needed by Mus-
lim traders or businessmen should be admitted even if it contradicts
clear text of the Qurʾān or the sunnah. It is based on such an approach
that the present study has concluded that in spite of the fact that the
forward contract in commodities is legal, such permissibility could not
be extended to the forward currency market for reason that this will
lead to ribā while the sharīʾah texts are clear regarding the prohibition
of ribā.
Considering the fact that a suitable alternative is needed, several pro-
posals have been advanced with the promise to bay or to sell currencies
in future as a preferred temporary solution. Some other solutions such
as the concept of mutual loan through the setting up of cooperative
fund or the basket currencies as means of risk management have also
been discussed.
The present study concludes that the development of a viable Islamic
future market is possible whether we chose the conventional forward
contract or salam as the basis for such a market. However, developing
a future market based on salam requires the resell of the subject matter
of salam before taking possession or the conclusion of a parallel salam.
However, the idea of reselling the subject matter of salam before taking
possession has been rejected by the majority of contemporary Muslim
304 conclusion
jurists for the simple reason that the majority of early Muslim jurists
has done so.
Here, we are faced once again with a methodology which does not
give any due consideration to al-ijtihād al-intiqāʾī 10 and fails to benefit
from the opinion of Ibn Taymiyyah and his disciple Ibn Qayyim who
very successfully expounded that there is nothing in the texts or Qiyās
which prohibits the resell of salam before taking possession or the
Mālikī’s opinion that such a transaction is legal if the subject matter of
contract is not foodstuff.
Moreover, considering the fact that the main argument against sale
prior to taking possession in the work of classical Muslim jurists, is
the possibility of gharar, the present study argued that such a gharar
is almost nonexistent in the contemporary futures market with the
presence of the clearing house which guarantees the execution of the
contract. This is furthermore enhanced by the tight supervision of
the market by the exchange authorities by controlling the position of the
market participants and the fidelity fund which is established in order
to compensate the victim of a default by brokers. Thus, it is concluded
that it is permissible to sale before taking possession, in reliance on
the opinion of the Mālikī school and that of Ibn Taymiyyah and Ibn
Qayyim and the absence of gharar.
Regarding speculation it is submitted that despite the fact the issue
is most commonly cited to invalidate derivatives contract, it is almost
impossible to get rid of speculation in its broader sense because every
business requires a degree of speculation and forecast. It is based on
this reality that several Muslim economists such as Fahīm Khān, Aḥmad
ʿAbdel Fattāh, Muhammad Akram Khān, Muhammad Obaitullah and
others acknowledge that a limited form of speculation is not only
unavoidable but desirable to the good performance of the market. Yet,
excessive speculation based on manipulation, cornering and fraud is
unIslamic and any possible use of derivatives contracts in Islamic finance
must be clear of that kind of speculation.
Furthermore, it has been demonstrated that associating speculation
with financial crisis is not always justified. Yet, speculation definitely
aggravates the situation but generally the real causes of the problem
lies elsewhere. It could weaknesses in the macro and microeconomic
10
Regarding the concept of al-Ijtihād al-Intiqāʾī see, Youssuf al-Qaraḍāwī, al-Ijtihād
fi al-Sharʿiah al-Islāmiyyah, Dār al-Qalam, 1989, Kuwait.
conclusion 305
structure of the economies affected as it is the case with the financial

crisis of 1997 in South East Asia or due to poor supervision and lack
of decisive management of the specific affected market as it is with the
crash of the Futures Commodity Market in Malaysia 1984 or the crash
of the stock market crash in Kuwait 1984.
The study on options from an Islamic perspective shows that khiyār
al-sharṭ could serve as a tool of risk management and fulfill some of
the benefits associated with conventional options. It could be used in
murābaḥ ah, ijārah, and ordinary sale or common stocks trading as a
tool of risk management as it has been explained above. Moreover, if
we consider the possibility of charging a fee in exchange of giving an
option, the benefits of khiyār al-sharṭ as a tool of risk management may
be parallel to that of the conventional options at least in the primary
market. Yet, from the above investigation, there is nothing in Islamic
law, which prevents the exchange of such a right for money.
Moreover, the present study reveals that the possibility of Islamically
acceptable options through bayʿ al-ʿarbūn is much promising than it is
with khiyār al-sharṭ. Thus, arbūn as a tool of risk management could be
used in commodities and services, share trading, in murābaḥ ah, salam
and istiṣnāʿ. Designing a call option through ʿarbūn is already acknowl-
edged by some Muslim economists while the possibility of a put option
is also possible through the reverse ʿarbūn as it is defended throughout
the present study or through other formulas mentioned above.
Furthermore, the expansion of options trading requires that the right
in options must be accepted as a valid subject matter of a contract. Some
previous studies have concluded that such a pure right could not be
a valid subject matter of contact in Islamic law and therefore, option
trading is illegal. This conclusion has been refuted in the present study.
First of all, the concept of māl or property in Islamic law does include
rights according to the majority of Muslim scholars. And since the
right in options trading is a property right, it is considered as māl and
therefore, it could be the subject matter of contract. Secondly, given the
fact that there is no single text, which defines the characteristics of a
right which should be accepted as a property right, the whole issue is
based on custom. Considering the fact that the right in options trad-
ing is recognized internationally as a property right, it can be regarded
as a valid subject matter of a contract in Islamic law since this does
contradict any text.
Moreover, the treatment of numerous cases involving the sale or
exchange of rights shows that the right in options trading should not
306 conclusion
be an exception, given the fact that there is no text which stipulates

certain rights could be exchanged while others could not.
To support this proposition, the present study referred to several
cases where a right is sold or exchanged with money, such as, the case
of ḥ aqq al-nuzūl ʿan al-wazāʿif, the right of shuf ʿah or preemption, the
rights of irtifāq or ḥ uquq al-irtifāq, the right in badal al-khulu, the right
of precedence over unused land, the right in intellectual property, the
right of option in khiyār al-sharṭ exchanging one’s right to bargain with
something, a wife exchanging her right to have her husband with her,
in her journey, dropping her right of ḥ aḍānah or custody in exchange
of something, or dropping one’s right to recover one’s gift in exchange
of something. All these cases show that any property right or ḥ aqq mālī
could be sold or exchanged if the prevailing custom allows it. There-
fore, the right in options trading could be exchanged by analogy to the
above cases and based on the general theory of freedom of contracts
and conditions.
Besides, the present study concluded that the claim that options
trading involves the combination of two contracts in one transaction
is unwarranted. None of the interpretations given to the ḥ adīth about
this kind of sales falls within the purview of options trading. In addi-
tion, it is demonstrated that the claim that options trading is a kind of
gambling is unfounded.
However, since the derivatives instruments discussed above are just
the fundamental forms of derivatives available in the international
market and considering the fact that it is possible to create an infinite
variety form of derivatives instruments11 the present study will attempt
to advance some of the Islamic contracts with derivatives potential for
future consideration.
The contract of istijrār for instance, offers a great potential for risk
management. It is a contract which differs from the ordinary sale by vir-
tue of the fact the price in istijrār may not be exactly known at the time
of conclusion of the contract, as it is in ordinary sale, but determined
according to market price. In other words, it is a contact of buying a
specific commodity in a regular basis, according to market price, with
the price settled at the end of the deal or has been placed as a deposit
with the seller. The exact price of the commodity could be known during
11
See Iqbāl Afzal “Engineering Islamic Finance”, Islamic Banker, November 1996,
p. 241.
conclusion 307
the period of istijrār if the price of the commodity is stable. It could be

also a flouting price such as the market price in specific day if it is well
defined and could not lead to dispute. The contract is not widely applied.
However, according to Obaidullah cases of istijrār are introduced by the
Muslim Bank of Pakistan and by Dār al-Māl al-Islāmī group.12
According to the istijrār contract the sale price of the commodity
that is traded, is computed as the average of the market prices during
the financing period. To illustrate the situation let us take the follow-
ing example. A firm needs a short term financing for its raw material
purchases for a specific period, say six months. The firm approaches
an Islamic bank to finance this purchase. The sale price is not set at
the conclusion of the contract but rather it is determined at the end of
the financing period. The sale price is set at the average of series prices
of the material during the period of financing. Istijrār can include an
option or khiyār al-sharṭ for either party to the contract.
On the other hand, innovations in derivative trading in the conven-
tional system is growing fast. One of the recent innovations is swaps
contracts. There are interest rate swap, currency swap, equity swap
and commodity swap. Definitely interest rate and currency swaps are
out of Islamic finance due to the clear involvement of ribā as it is the
case with interest rate swaps or the deferred delivery in currency swap
which also a kind of ribā.
However, some Muslim economists propose commodity swaps, as
an instrument that could be accommodated into Islamic finance. It is
maintained that commodity swaps are more naturally fit into Islamic
financial system which promote trade. This is justified on the basis that
swap agreement is simply a series of forward contract and the legality
of forward is already established.
Commodity swaps are used by many consumers and producers of
commodities to hedge price rises over a long term period. Consumers
and producers are often linked to long terms contracts to buy or sell
where the delivery price is determined by price index price. This means
that the price at delivery in not known until a short time beforehand
o until the actual delivery date.13
12
Obaidullah, “Financial Engineering with Islamic Options”, Islamic Economic
Studies, p. 93.
13
The Reuters Financial Training Series, An Introduction to Derivatives, p. 136.
308 conclusion
Energy swaps for oil products, in particular, has been increasingly

more important in the derivatives markets since 1991.14 Thus, it is sug-
gested that “for countries whose economies are heavily dependent on
the sale or purchase of a commodity such as oil producing Muslims
countries of the Persian Gulf, commodity swap can offer price protec-
tion against futures price variations and can provide better control and
forecasting in the futures”.15
Despite the fact the proponents of commodity swap maintain that
it is a series of forward contracts, one of the fundamental differences
between the two contracts is that in the forward contract there is clear
commitment of taking delivery while in the commodity swap there is
no possibility of any physical transfer. This issue may stand as a stum-
bling block in the admission of this new type of derivatives instrument
into Islamic finance.
14
Ibid.
15
Zamir Iqbal, “Financial Innovation in Islamic Banking”, p. 14.
GLOSSARY OF ARABIC TERMS
ʿAdl Justice, fairness, balance.

Aḥ ādith Plural of ḥ adith. (For meaning, see below.)
Aḥ kām Plural of ḥ ukm. (For meaning, see below.)
Al-ghurm bi al ghunm One is entitled to a gain only if one agrees to
bear the responsibility for the loss.
Al-kharāj bi al-ḍamān Entitlement to return or yield is for the one
who bears the liability (ḍamān) for some-
thing.
ʿAqīdah Belief and creed.
Athmān Pls. of thaman, money of exchange.
Awqāf Plural of waqf. (For meaning, see below.)
Āyah A verse from the Qurʾān.
Bayʿ Sale contract.
Bayʿ al-ʿarbūn A sale contract, in which a down payment
is given and the parties commit themselves
to the agreed conditions. The buyer has the
right to cancel the sale, but then he will lose
the Down payment.
Bayʿ al-aʿayān Sale of tangible objects such as goods (as
against Sale of services or rights).
Bayʿ al-dayn Sale of debt.
Bayʿ al-dayn bi al-dayn A sale contract involving exchange of one debt
with another.
Bayʿ al-maʿdūm Sale of a commodity which does not exist.
Bayʿ al-ʿīnah Selling of something to someone at a given
price (usually on credit) and then buying it
back from him at the same time at a different
price (usually for a lower price, but cash).
Bayʿ al-kāliʾ bi al-kāliʾ A sale in which both the delivery of the object of
sale and the payment of its price are delayed. It
is similar to a modern forward Sale contract.
Bayʿ al-salam It is also called bayʿ al-salaf. A sale contract
where two parties agree to carry out a sale/
purchase of an underlying asset at a predeter-
mined future date but at a price determined
and fully paid on spot.
310 glossary of arabic terms
Bayʿ al-ṣifah Sale based on detailed description of the

object of sale.
Bayʿ bi-thaman al-ʾājil Another term used for bayʿ muʾajjal. For
meaning see below.
Bayʿ muʾajjal Sale on credit or a sale in which goods
are delivered immediately but payment is
deferred.
Buyūʿ Plural of bayʿ: Sales.
Ḍ arar Damage, harm, injury.
Dayn Debt.
Ḍ arūrah Necessity. (Usually used whereby something
otherwise prohibited becomes temporarily
permissible.)
Dhimmah Liability, responsibility.
Dinār (plural Danānīr) A monetary unit. In early Islamic history.
Dirham (plural Darāhim) A monetary unit. In early Islamic history.
Fāsid Irregular. It refers to irregularities in, or
non-fulfilment of, some conditions of the
contract. The contract is null and void
in majority opinion but not the Hanafi
school.
Fatāwā Plural of fatwā. Religious verdicts by Mus-
lim Scholars.
Fiqh Refers to the whole body of Islamic
jurisprudence. It covers all aspects of life,
religious, political, social, commercial or
economic. It is based primarily on inter-
pretations of the Qurʾān and the Sunnah.
While the Qurʾān and the Sunnah are
immutable, fiqh verdicts may change due
to changing circumstances.
Fulūs cheap metal or copper money.
Fuqahāʾ sharīʿah Scholars.
Gharar Literally, it means deception, danger, risk
and uncertainty. Technically it means
exposing oneself to excessive risk and
danger in a business transaction as a result
of uncertainty about the price, the quality
and the quantity of the counter-value, the
date of delivery, the ability of either the
glossary of arabic terms 311
buyer or the seller to fulfil his commit-

ment, or ambiguity in the terms of the
deal, thus exposing either of the two
parties to unnecessary risks.
Gharar fāhish Excessive gharar.
Gharar Yasīr A little bit of gharar. It is tolerable be-
cause it may be unavoidable
Hadānah The right of custody of a child after
divorce.
Ḥ adīth Sayings, deeds and endorsements of the
Prophet Muhammad (peace be upon
him) narrated by his Companions.
Ḥ ajj Pilgrimage to Makkah. It is an obligatory
duty on every Muslim if he can afford
it, physically and financially.
Ḥ alāl Things or activities permitted by the
sharīʿah.
Ḥ anafi A school of Islamic jurisprudence named
after Imam Abu Hanifa.
Ḥ anbali A school of Islamic jurisprudence named
after Imam Ahmed bin Ḥ anbal.
Ḥ aqq Right.
Ḥ aqq al-irtifāq Literally, the right of utilization or ease-
ment; technically, the right to derive
benefits gratis from the immovable
property of someone else. The right has
been recognized by the sharīʿah in the
spirit of generosity that members of a
community should display towards each
other.
Ḥ aqq al-nuzūl an al-wazāʾif Under Islamic law, certain appointments
are for the lifetime of the incumbent.
However, he can relinquish the post
by his own volition. Ḥ aqq al-nuzūl an
al-wazāif refers to this right of relin-
quishing the post. According to some
scholars, he can relinquish his post to
another person in exchange for money.
Other scholars do not allow charging
any money.
Ḥ arām Things or activities prohibited by the

sharīʿah.
Ḥ araj Difficulty and hardship.
Ḥ īlah (plural ḥ iyal) Legal trick or device to avoid imposition
of a law in a particular case.
Ḥ uqūq al-irtifāq (singular Refers to certain rights granted (gratis) to
ḥ aqq al-irtifāq) a neighboring house owner, such as, to
place a beam on his wall, pass a sewage
pipe through his territory to connect to
the main line, etc.
ʿIbādāt Duties of man due to God.
ʾIbāḥ ah Permissibility from a sharīʿah point of
view.
Ijārah Leasing. Sale of usufruct of an asset. The
lessor retains the ownership of the asset
with all the rights and the responsibilities
that go with ownership.
Ijārah muntahiyyah Lease ending in ownership.
bil-tamlīk
Ijmāʿ Consensus of Muslim scholars in specific
issue. Ijmaʿ is one of the source of Islamic
law.
Ijtihād Endeavour of a jurist to derive a rule or
reach a judgment based on evidence found
in the Islamic sources of law, predomi-
nantly, the Qurʾān and the Sunnah. The
intellectual effort of Muslim jurists to reach
independent religio-legal decisions.
ʿIllah Effective cause, ratio legis or Reason/char-
acteristic behind a Sharīʿah ruling such
that if a particular reason/characteristic is
found in other instances, the same ruling
will apply.
Istihsān It refers to departure from a ruling in a
particular situation in favour of another
ruling, which brings about ease. This is
done by taking a lenient view of an act
which would be considered a ‘violation’ on a

stricter interpretation of the action based on
earlier qiyās.
Istijrār It is a contact of buying a specific commodity
in a regular basis, according to market price,
with the price settled at the end of the deal and
kwon during the period of the contract.
Istisnāʿ A contract whereby a manufacturer (contractor)
agrees to produce (build) and deliver a well-
described good at a given price on a given date
in the future.
Juʿālah A party pays another a specified amount of
money as a fee for rendering a specific service
in accordance to the terms of the contract
stipulated between the two parties. This mode
usually applies to transactions such as consul-
tations and professional services, fund place-
ments and trust services.
Karāhiyyah (makrūh) Something that is not completely prohibited by
the sharīʿah but is abhorred.
Kayliyyan Weighable.
Khiyār Option.
Khiyār al-ʿayb Option to rescind a sales contract if a defect is
discovered in the object of sale.
Khiyār al-Shart The option to rescind a sales contract based
on some conditions. One of the parties to a
sales contract may stipulate certain conditions
which, if not met, would grant a right to the
stipulating party to rescind the contract.
Khiyār al-Naqd It is the right of either of the parties to con-
firm the contract or to cancel it by means of
the payment of the price. In other words, it is
the conclusion of a contract with the option
that the payment of the price, within a specific
period, would confirm the contract while a
failure to do so would get cancelled.
Khuluʿ Divorce in return for forgoing dower of wife
or the giving of monetary compensation by the
wife to the husband.
Mdhhab (plural madhāhib) School of Islamic law.

Mafsadah (plural Mafāsid) Anything declared harmful by the sharīʿah
or anything hampering the achievement
of the maqāsid of sharīʿah.
Māl Asset, property.
Māliki A school of Islamic jurisprudence named
after Imam Malik.
Manfaʿah Usufruct. Benefit derived from a durable
commodity/asset.
Maqāsid al-Sharīʿah Basic objectives of the sharīʿah. These are
protection of faith, life, progeny, property
and reason.
Masālih Mursalah Sing. Maslahah Public interest as deter-
mined in the light of the rules of sharīʿah.
A Maslahah refers to any action taken to
protect any one of the five basic objectives
of the sharīʿah.
Maysir Technically, gambling or any game of
chance.
Muʿamalāt The corpus of Islamic law regulating rela-
tion and contracts among human beings
(as against Ibādāt, which define relation-
ship between God and His creatures).
Muʿawadāt Contracts which involve exchange of value
for value. As against this, tabarruʿāt are
contracts involving one-way transfer of
value.
Mudarābah A contract between two parties, capital
owner(s) or financiers (called rabb al-māl)
and an investment manager (called
mudārib). Profit is distributed between
the two parties in accordance with the
ratio upon which they agree at the time of
the contract. Financial loss is borne only
by the financier(s). The entrepreneur’s
loss lies in not getting any reward for his
services.
Mudārib An investment manager in a Mudārabah
contract.
Muḥtasib Government Officer supervising the market.

Mukhātarah Risk.
Muqāraḍah or Qirāḍ Carries the same meaning, as Mudārabah For
meaning, see above.
Muqāwalah
Murābahah Sale at a specified profit margin. The term,
however, is now used to refer to a sale agree-
ment whereby the seller purchases the goods
desired by the buyer and sells them at an
agreed marked-up price, the payment being
settled within an agreed time frame, either in
installments or in a lump sum. The seller bears
the risk for the goods until they have been
delivered to the buyer.
Mushārakah Partnership. A mushārakah contract is similar
to a mudārabah contract, the difference being
that in the former both partners participate in
the management and the provision of capital,
and share in the profit and loss. Profits are
distributed between the partners in accordance
with the ratios initially set, whereas loss is dis-
tributed in proportion to each one’ share in the
capital.
Najash To bid up the price of the item, not with the
intention to purchase the item, but rather to
raise the price for the customers intending to
deceive the buyers).
Naṣ Text from Qurʾan or Sunnah.
Qabḍ Possession.
Qāḍi Judge.
Qimār Gambling.
Qiyās Application of a rule/law on the analogy of
another rule/law if the basis (ʿillah) of the two
is the same. It is one of the secondary sources
of Islamic law.
Rabb al māl Capital owner (financier) in a Mudārabah
contract.
Rahn To pledge something of material value as a
security for a debt or pecuniary obligation.
Ribā Literally, it means increase or addition or growth.

Technically it refers to the ‘premium’ that must be paid
by the borrower to the lender along with the principal
amount as a condition for the loan or an extension in
its maturity. Interest as commonly known today is a
form of riba.
Riba al-Fadl Riba pertaining to trade contracts. It refers to exchange
of different quantities (but different qualities) of the
same commodity. Such exchange in particular com-
modities defined in the sharīʿah is not allowed.
Riba al-nasīaʾ Riba pertaining to loan contracts.
Rihān Betting.
Salam The short form of bayʾ al-salam.
Samāsirah Brokers.
Sarf Currency exchange.
Shāfi A school of Islamic Law named after Iman Shafii.
Sharīʿah Refers to the corpus of Islamic law based on Divine
guidance as given by the Qurān and the Sunnah and
embodies all aspects of Islamic faith.
Shuf ʿah Right of pre-emption.
Sunnah The Sunnah is the second most important source of the
Islamic faith after the Qurʾān and refers to the Prophet’
(peace be upon him) example as indicated by his prac-
tice of the faith. The sunnah is the collection of ahādith
which consist of reports about the sayings, deeds and
endorsements of the Prophet (peace be upon him).
Taʿām Eatables.
Taʿāwun Cooperation (for good).
Tabarruʿ Actions/contracts, the purpose of which is not com-
mercial but is seeking the pleasure of Allah.
Taḥ jīr Barren land.
Takāful An alternative for the contemporary insurance con-
tract. A group of persons agree to share certain risk
(for example, damage by fire) by collecting a specified
sum from each. In case of loss to anyone member of
the group, the loss is met from the collected funds.
Thaman Money.
ʿUrf Custom.
ʾUṣūl Principles, basics.
ʾUṣūl al-fiqh Islamic Jurisprudence.

ʿUlūm al-ḥ adīth Science of the ḥadīth.
Wakālah Contract of agency. In this contract, one person
appoints someone else to perform a certain task on
his behalf, usually against a fixed fee.
Waqf Appropriation or tying up a property in perpetu-
ity for specific purposes. No property rights can
be exercised over the corpus. Only the usufruct is
applied towards the objectives (usually charitable)
of the waqf.
Zakāh The amount payable by a Muslim on his net worth
as a part of his religious obligations, mainly for the
benefit of the poor and the needy. It is an obligatory
duty on every adult Muslim who owns more than a
particular level of wealth.
Zanni Based on conjecture.
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INDEX
Abd Allah bin Beya xv 128, 130–133, 135–136, 138–142, 146,

Abd al-Wahhab Abu Sulaiman 38, 66, 149–151, 160, 162–164, 168, 170–171,
270, 287, 302 181–182, 207–208, 210, 214–215, 220,
Abu Ghuddah 20, 167, 288 243, 260, 289, 299–303, 305, 307
Ajeel Jasem xiv Contract 2–3, 5–30, 32–53, 55–72, 76,
Al-ghurm bi al ghunm 309 79–82, 85, 93, 95–100, 103–106, 108,
Ahmad Ali Abdullah 58 113, 115–118, 121–131, 133–136,
Al-kharāj bi al-ḍamān 309 139–141, 143, 146–148, 153–154,
Ali al-Salus 84 n. 29, 161 157–159, 165–171, 173–182,
Al-Taskhiri 38, 213, 302 186–187, 189–191, 195–196, 198–204,
Al-Zuhailī 19, 166–167, 172–173, 239 206–215, 218–232, 234–235, 237,
American option 203–204, 257 240–259, 261–262, 264, 266–272, 277,
Arbitrage 30, 44, 137, 155–156 287–288, 291–292, 294, 298–299–310,
Athmān 5, 84, 86–90, 101, 309 313–317
Cooperative fund 11, 303
Bayʿ al-ʿarbūn 7–8, 10, 35–36, 38–39, Countervalues 9, 11, 19, 30, 33, 42, 46,
42, 204, 220, 238–240, 251, 305, 309 48, 52–54, 58–60, 63–65, 76, 80, 97,
Bayʿ al-aʿayān 309 99–100, 102, 108, 123, 147, 171–172,
Bayʿ al-dayn bi al-dayn 10, 26, 63, 118, 175, 226, 259, 300
171–172, 174–175, 309 Currency
Bayʿ al-ʿīnah 147–148, 163, 265, 309 currency by creation 91–93
bayʿ al-kāliʾ bi al-kāliʾ 5, 9, 12, 17–18, currency exchange 6, 12–13, 19, 24,
20–21, 27, 32, 49, 53, 57, 59, 64, 80, 29, 57–60, 96–97, 100, 102–103,
106, 108, 129, 171–175, 299–300, 309 105–108, 114–115, 170, 209, 242,
Bayʿ al-maʿdūm 270, 309 316
Bayʿ muʾajjal 23, 263 Currency basket 110
Bayʿ al-salam 17, 23–24, 48–50, 63, 99, Custody 10, 272, 296–297, 306, 311
209, 309 Custom 21, 32, 45, 59–60, 77, 79–80,
Bayʿ al-ṣifah 12, 48–49, 65–67, 70, 86–87, 93, 105, 110, 114–115,
301–302, 310 169–170, 178–180, 188–189, 229,
Bazie Al-Yaseen xiii 239, 266, 273–277, 281–282, 284–286,
Bretton Woods system Brokers 74 292–293, 298, 305–306, 316
Bucketing 186
Daily
Call option 11, 39, 196–197, 204–205, marking 34, 117
220, 243, 246, 253–254, 263–264, 305 price 127, 190
Cash market 30, 121, 168 turnover 153
Chicago Board 130, 206, 208 volume 153
Clearing house 125, 132, 137, movement 190
139–140, 168, 171, 173, 182–183, 304 limit 190
Combination of two contracts in one Ḍ arūrah 18, 115–116, 302
transaction 41, 221, 251, 264, 306 Debt/s 5–6, 8–9, 12, 21 n. 13, 26,
Commodities 4–5, 8, 10–11, 13–16, 32–33, 51, 54, 57–59, 63, 67, 70,
19, 22, 26, 28, 37, 44, 49, 51, 58, 90–91, 94, 97, 107, 109, 118, 121,
61, 70–73, 76–78, 80, 82, 84–85, 89, 157, 172–176, 179, 185, 218, 300, 302,
91–92, 95, 97–98, 111, 118, 122–126, 309–310, 315
330 index
Deferred Fluctuation 11, 15, 31, 38, 44, 63,

basis 5–6, 12, 71, 77–80, 82–87, 96, 102–103, 106–107, 109–112,
89–90, 93, 95, 98, 101, 228, 265, 135–136, 138, 142–143, 199, 229,
302 263
commodity 28, 50, 250 Foodstuffs 123, 130, 133, 148, 159–165,
contract 15, 97, 103 184, 224, 304
debt 175 Foreign currency 19, 29, 96, 99, 103,
delivery 50, 307 104–106, 108, 113–114
payment 86, 106 Forward
sale 23, 27, 63, 69 basis 5–6, 9, 11–12, 72, 82, 93, 224,
settlement 100 302
trading 209–210 contract 5–8, 11–12, 18–19, 23,
Derivatives 25–27, 34, 44–51, 55, 57, 60–67,
contracts 23, 299, 304 70–71, 97, 105, 113, 115–118, 122,
instruments 4, 9, 218–219, 299, 306, 124–125, 128–130, 134, 165, 170,
308 175, 195, 299–303, 307–308
market 3–4, 121, 144, 206, 308 currency exchange market 12, 24,
trading 9, 11, 19, 71, 137–138 96, 103
Difference of Opinion 20, 30, 159, 172, price 116
189, 219, 226, 247, 256, 278, 283, 287, sale, trading 12, 42, 55, 63, 259, 309
289, 295–296 Freedom of contract 40, 210, 220, 231,
Dinār 79–80, 88, 93, 101, 107, 252, 256, 259, 267, 269, 306
173–175, 237, 264–265, 294, 310 Fulūs 79, 84, 86–87, 94, 96, 98–100,
Dirham 79, 93, 101, 104, 173, 175, 209–210, 224, 303
237–238, 265, 268, 310 Fungible good 26, 33, 68
Divorce 295–297, 311, 313 Futures Contract 6, 8, 10, 12, 14–18,
Dubai Islamic Bank 75–76, 248, 20–23, 25–26, 28–30, 34, 48, 50,
249 n. 35 116–118, 121–126, 129–131,
133–136, 140, 143, 147–148, 159,
Economics 6, 10, 12–13, 15, 25, 26 168–171, 175, 178–179, 181–182,
n. 19, 28, 36, 47, 59–60, 72, 76, 79, 90, 186–187, 191, 195, 201–202, 208,
103, 121, 130, 135, 137–138, 145–147, 211, 218, 301
149, 151–154, 156, 183–184, 198–199, Futures Industry Act 8–9, 12, 118,
210, 215, 217–219, 229–230, 255, 261, 121–122, 139, 177–180, 182, 186–187,
266, 310 189
El-Gari 17–18, 35–36, 90, 92, 109, futures Brokers 8, 177, 180
157, 198–199, 208, 253, 256–257, futures fund manager 177–178
271 contract commodity 18, 130, 158
European option 12, 203–204 exchanges 117, 139, 190
Exercise industry: market 8, 10–12, 15, 25,
date 204 28–30, 32, 37, 42, 49, 117–118,
price 203–204, 229 121–125, 128, 130–135, 138–142,
144–145, 148, 150, 153, 157,
Fahim Khan 28–30, 51, 134, 144–145, 162–165, 167–168, 170, 173, 176,
167–168, 304 178, 180–182, 186–187, 191, 201,
Financial 304
crisis instruments 12, 109, 150, trading 5, 8–9, 12, 14–19, 21–22,
304–305 24–32, 34, 46, 50, 56, 123–124, 130,
institution xx, 1, 3–5, 37, 83, 301 132, 136, 155, 157, 167, 170, 178,
market transaction, right 15 188
system, value 6, 10, 49, 118,
154, 198, 225, 231, 247, 261, Gambling 4, 7–8, 13–14, 19, 29, 32,
307 36–38, 42, 55, 118, 143–144, 147, 208,
floor 121, 132, 140, 151, 191 210–216, 218, 221, 244, 259–260, 306
index 331
Gharar 17, 26–27, 32, 48, 51 n. 23, Kuala Lumpur Futures Market 132
52–56, 58–59, 63–66, 68–70, 108, Kuala Lumpur Interbank Offered rates
160–161, 166, 173, 176, 210, 216, 218, 133
237, 240, 259, 264, 267, 295, 299–300, Kuala Lumpur Commodities Clearing
302, 304 House Sdn Bhd 140
gharar fāhish 35, 311 Kuwait Finance House 80–81, 106, 161
gharar yasīr 311
Gold for gold 72, 76–78, 97, 104–105 Māl 273, 314
gold standard 74 Manfaʿah 36, 213, 273–275, 280–281,
Great Depression 74 284, 296, 314
Market
Hadānah 10, 295, 297, 306, 311 crash 143, 150, 154, 305
Ḥ aqq 272, 296 forces 15, 75, 267
Ḥ aqq al-irtifāq 312 manipulation 151
Ḥ aqq al-nuzūl an al-wazāʿif 276–277, movement 150, 196
292, 306 participants 15, 118, 123, 138, 170,
187, 207, 298, 304
Ibn Mani 93, 240, 245–246 place 29, 124–126, 139, 185
Ijārah 7, 13, 48, 213, 228, 230, price 42, 96, 125, 135, 168, 190–191,
242–244, 257, 305, 312 202, 253, 258, 263, 296, 306–307,
Ijārah muntahiyyah bil-tamlīk 312 313
ʿIllah 5, 12, 17, 21, 69, 72, 77, 79–81, problem 146
83–87, 89, 94, 98, 100–102, 134, 148, offenses 118
162–163, 173, 209, 303, 312, 315 operation 186–187
illah qāsirah 84 rigging 145
Istisnāʿ 5, 11, 13, 18–19, 23, 25, 28, risk 1, 121
48–49, 61–64, 70, 130, 251–252, share 22
299–301, 305, 313 medium of exchange 76–77, 79–83,
Interest rate 1, 10, 47, 122, 133, 158, 85–95, 98–100, 102, 209, 303
208, 259–263, 299, 307 Mohammed Obaidullah 40, 99–102,
Islamic law xix, 4–13, 18, 20, 22–23, 134, 200, 209, 222, 307
25–26, 28–29, 32–33, 37, 39, 43, 45, Monetary system 12, 72–73
47–49, 51–52, 55, 66–67, 70, 72, 86, Money by creation 6, 88, 93
89, 94, 103, 106, 113, 115, 118, 129, Monzer Kahf xvi
159, 180, 188, 201, 218–219, 221–223, Muhammad Akram Khan 23–25, 114,
226, 231–233, 237, 244, 251, 256, 117, 149, 156, 304
258, 263, 266, 269–270, 272–273, Mukhtar al-Salami 19, 36–38, 46, 48,
276–277, 280–281, 284, 286, 289–290, 59, 65, 135, 161, 212–213, 269–270,
295–296, 299, 301–302, 305, 311–312, 287, 302
314–316 mutlaq al-thamaniyyah 81, 85–87, 94,
303
Kamali xi, 24–28, 34 n. 39, 38–40, Mutual loan 109–110, 303
54, 144, 164, 166, 222, 231, 233, 253, Mutual promise for currency
266–267, 269 exchange 103
Khiyār al-ʿayb 313
Khiyār al-Shart 6–8, 10, 13, 35–36, Najash 32, 184, 189, 315
38–42, 59, 204, 212, 215–216, Nazih Hammad 56, 58, 115, 161,
219–220, 222–226, 228–235, 240, 166–167, 174, 251
259, 270–271, 273, 287–294,
297–298, 305–307, 313 Obaiyathullah 216
Khiyār al-Naqd 6–7, 219–220, Option 6–13, 17–21, 24–26, 32, 34–43,
222–223, 233–236, 313 59, 65, 100–101, 104, 118 n. 50,
Kuala Lumpur Commodity Exchange 121–122, 127, 133, 140, 143, 145,
23, 117, 131–132, 138, 150 177–178, 181–182, 191, 196–216,
332 index
218–234, 237, 241, 243, 246–248, of pure right 7–8, 13, 247, 269, 284
251–255, 257–267, 269–273, 275, prior to taking possession 8, 10, 12,
277–279, 282, 284, 287–294, 297–299, 21 n. 13, 26, 118, 159, 161–163, 304
305–307, 313 Saleh al-Marzuqi 87–89
Sayyid Abdul Jabbar 23, 117
Palm oil 4, 37, 103, 117, 125–127, Second World War 74
131–132, 136–138, 153, 167, 190 Securities Commission 182–183,
Paper money 12, 76, 78–88, 90, 92–96, 267–268
98–100, 102, 209, 224, 302–303 Siddq Al-Darir 37, 59, 212–215, 241,
Permissibility 8–9, 11–12, 24, 27, 40, 255–256, 270, 287, 292, 302
51, 55, 57–58, 67, 71, 87, 99–100, Silver 5–6, 72–74, 76–81, 83–90,
104–105, 134, 165, 174, 239, 269, 277, 92–102, 104–105, 209, 303
297–298, 301–303, 312 Speculation 6, 8, 10, 12, 26, 29–32,
Prevailing 32, 44, 59, 75, 77, 82–83, 41, 44, 99, 103 n. 17, 118, 131, 141,
104, 134, 161, 170, 245, 251, 262, 266, 143–151, 153–157, 176, 191, 211–212,
270, 276–277, 280–281, 283, 292, 298, 216, 229–230, 259–260, 304
306 Stock
Prohibition 1, 10–12, 17, 21, 23, 27–28, Exchange 147, 156, 198, 216, 253,
30, 33, 51 n. 23, 52–53, 58, 64, 68–69, 257
72, 77, 84–85, 87, 89, 100–101, 106, indices 16, 19, 29, 208, 214, 259–260,
109, 129, 133, 148, 160–163, 172–176, 299
187, 209–210, 239, 256, 264, 272, margin 157
300–301, 303 market 17, 19, 97, 115, 154, 157,
promise 19, 24, 35, 44, 70, 75, 82, 93, 198–199, 210, 229, 245, 305
103–109, 112–113, 229, 238, 245, 247, option 122
249, 283, 299, 301, 303 price 205–206
Public interest 14, 19–20, 26, 37, 46, trading 7, 13, 157, 214
56, 108, 190, 266, 282, 286, 314 Sudin Haron 49
Put option 11–13, 197, 199, 201–202,
204–206, 220, 254, 256–258, 263–264, Taʿām 161, 164–165, 316
305 Taḥ jīr 10, 282, 316
Taqi Usmani 20, 212, 285–286, 297
Rafiq al-Misri 109 Thaman
Risk thamaniyyah 82, 85–86, 88–90, 93,
management 3–7, 12–13, 33, 37, 40, 95, 98
93, 116, 121, 132, 142, 191, 204, mutlaq al-thamaniyyah 25, 81,
219–220, 223, 228–231, 234–235, 84 n. 29, 85–87, 94, 303
252, 275, 299, 303, 305–306 qhalabat al-thamaniyyah 85
mechanism 124 thaman ḥ aqīqī 99, 101
reduction 39, 252–253
shifting 29, 135–136 Umar Charpa 25
United States 74, 78, 91, 124, 130, 206
ṣarf 6, 19, 58–60, 78, 81, 89–90, 96,
103 n. 17, 104–105, 115, 316 Vogel, Frank E. 32, 34 n. 39, 42–43,
Sale 168, 254, 257, 272
of commodities 160, 243
of currency by description 5, 48, weighable 77–78, 85, 101–102, 313
65–66, 301
of debt of nonexistent 5, 302 Zakah 79–81, 84, 86, 95, 146, 149, 164,
of foodstuff 162–163, 224 317
of gold 104 Zamir Iqbal 50
ABSTRACT
The importance of derivative instruments as tools of risk management

is taken for granted in the modern financial system. Many Muslim
scholars have stressed the need for a prudent utilisation of such instru-
ments in Islamic equity markets, banking and finance. However, these
instruments may not be totally in compliance with Islamic principles
of muʾāmalāt. This study begins with a critical review of the previous
works and proceeds to analyse the forward, futures and option contracts
from an Islamic point of view. The present study also highlights their
economic benefits, their reason d’être, the legal aspect of these contracts
which may or may not be acceptable from sharīʿah perspective and
then attempt is made to propose Islamic alternatives whenever they are
deemed necessary and appropriate. Derivatives are used in commodities,
shares, currencies, interest bearing transactions and stock indices. The
scope of the present analysis is, however, limited to derivative transac-
tions based on commodities and shares. The use of these instruments
in interest rate and currencies is out of the scope of the present study
due to the involvement of ribā. Stocks indices are also excluded due to
their indulgence in excessive risk or gharar.
The discussion on the forward contract includes the forward com-
modity market, the possibility of trading gold on a forward basis and
the forward market for currencies. An analogy has been drawn between
the conventional forward contract and similar contracts in Islamic law
such as bayʿ al-salam, bayʿ al-istiṣnāʿ and bayʿ al-ṣifah. The present study
rebuts the claim that there is no benefit in the conventional forward
contract or that it contradicts the principle enshrined in the ḥ adīth
“do not sell what is not with you”. The possibility of trading gold on a
forward basis is also discussed starting with a brief history of the world
monetary system, followed by a critical analysis of several fatwās on
the issue of gold trading and then expounds on the ʿillah behind the
prohibition of selling gold on deferred basis and its implications on
trading gold on forward basis. No final conclusion has been upheld as
the main objective of addressing this particular issue in this work is to
invite more research on the issue due to its profound implications to
Islamic finance as a whole.
334 abstract
Several alternatives to the forward currencies are explored and

debated. Among the proposals advanced here are the concept of mutual
promise (muwāʿadah) which is a mutual promise of currency exchange
at the spot rate of exchange. These alternatives also include the concept
of mutual loan where an equivalent amount of money in different cur-
rencies is exchanged between the two parties as benevolent loan (qarḍ
ḥ asan) and the concept of a basket of currencies where the settlement
of price between the importer and the exporter is made in several hard
currencies. The final alternative is the idea of a cooperative fund whereby
traders will participate by depositing a certain amount of money that
will be managed by a third party in order to share the profit, if any, or
face any risk associated with possible currency fluctuations.
My analysis of the futures contract addresses the main arguments
against such a contract. I have elaborated on the concept of sale prior
to taking possession, the sale of debt for debt, hedging and the relation-
ship between speculation and margin trading and relevance, if any, of
speculation to financial crisis. The present research has also examined
the importance of the clearinghouse, the role of intermediaries in futures
market and the regulation of the futures industry. Generally I have
referred, in my discussion of these issues, to the Malaysian derivatives
industry and its regulatory framework.
The efficacy of trading in options is accentuated by the need to avoid
the problems associated with the forward and futures contracts. The
present study proposes khiyār al-sharṭ and bayʿ al-ʿarbūn as tools of
risk management and as possible alternatives to options. In this con-
nection I have argued that option does not involve the combination of
two contracts in one transaction. The present analysis also addresses
the use of ʿarbūn in currency exchange, commodities, financial services,
shares trading and salam.
The sale of pure rights, as it is in the case of options, is one of the hotly
debated issues raised against the permissibility of options. The present
study argues in favour of the sale of such rights relying on the general
principles of Islamic commercial law and by referring to specific cases
where a right is sold or exchanged for money. Included among the cases
I have highlighted are the sale of the right of shuf ʿah or preemption,
the rights of easements or ḥ uqūq al-irtifāq, the right of reservation over
barren land (taḥjīr), intellectual property right and the right of option in
khiyār al-sharṭ. The present research also deals with the permissibility
abstract 335
of exchanging one’s right to bargain for something; a woman waiving

her right of ḥ aḍānah or custody in exchange for something, or waiving
one’s right to recover one’s gift in exchange for something. Finally, the
present study raises the issue of involvement or otherwise of gambling
in options and provides suitable response.
‫ﻣﻠﺨﺺ اﻟﺒﺤﺚ‬ ‫‪337‬‬
‫اﻟﻤﻘﺎﺻﺔ ودور اﻟﻮﺳﻄﺎء ﻓﻲ أﺳﻮاق اﻟﻤﺴـﺘﻘﺒﻠﻴﺎت واﻟﻘﻮاﻧﻴﻦ اﻟﻤﻨﻈﻤﺔ ﻟﻬﺎ‪ ،‬وﻗﺪ اﻋﺘﻤﺪت‬
‫اﻟﺪراﺳﺔ ﻓﻲ ﻫﺬا اﻟﺠﺎﻧﺐ ﻋﻠﻰ ﻗﺎﻧﻮن اﻟﻤﺸـﺘﻘﺎت اﻟﻤﺎﻟﻴﺔ اﻟﻤﺎﻟﻴﺰي وﺗﻮاﺑﻌﻪ‪.‬‬
‫إن أﻫﻤﻴﺔ اﻻﺧﺘﻴﺎرات ﻓﻲ اﻷﺳﻮاق اﻟﻤﺎﻟﻴﺔ اﻟﻤﻌﺎﺻﺮة ﺗﻨﺠﻢ ﻋﻦ ﻗﺪرﺗﻬﺎ ﻟﺘﻔﺎدي ﻋﻴﻮب‬
‫ﻋﻘﻮد ﺗﺄﺟﻴﻞ اﻟﺒﺪﻟﻴﻦ وﻋﻘﻮد اﻟﻤﺴـﺘﻘﺒﻠﻴﺎت‪ ،‬وﻗﺪ انﻗﺸﺖ اﻟﺪراﺳﺔ إﻣﻜﺎﻧﻴﺔ ﺗﻘﺪﯾﻢ ﺧﻴﺎر‬
‫اﻟﺸﺮط وﺑﻴﻊ اﻟﻌﺮﺑﻮن ﻛﺄدوات إﺳﻼﻣﻴﺔ ﻟﻠﺘﺤﻮط وﻛﺒﺪﯾﻞ ﻟﻼﺧﺘﻴﺎرات‪ .‬ﻛﻤﺎ انﻗﺸﺖ اﻟﺪراﺳﺔ‬
‫اﺳـﺘﺨﺪام ﺑﻴﻊ اﻟﻌﺮﺑﻮن ﻓﻲ اﻟﺼﺮف واﻟﺴﻠﻊ واﻷﺳﻬﻢ واﻟﺨﺪﻣﺎت‪.‬‬
‫إن ﺑﻴﻊ اﻟﺤﻘﻮق اﻟﻤﺠﺮدة ﻛﻤﺎ ﻫﻮ اﻟﺤﺎل ﻓﻲ ﻋﻘﻮد اﻻﺧﺘﻴﺎرات ﯾﻌﺘﺒﺮ أﺣﺪ اﻷﺳﺲ‬
‫اﻟﺘﻲ ارﺗﻜﺰ ﻋﻠﻴﻬﺎ اﻟﺒﻌﺾ ﻟﺘﺤﺮﯾﻢ ﻫﺬﻩ اﻟﻌﻘﻮد‪ ،‬وﻗﺪ ذﻫﺒﺖ اﻟﺪراﺳﺔ إﻟﻰ ﺟﻮاز ﺑﻴﻊ ﻣﺜﻞ‬
‫ﻫﺬﻩ اﻟﺤﻘﻮق ﻣﻌﺘﻤﺪة ﻓﻲ ذﻟﻚ ﻋﻠﻰ اﻟﻘﻮاﻋﺪ اﻟﻌﺎﻣﺔ ﻟﻠﻤﻌﺎﻣﻼت ودور اﻟﻌﺮف ﻓﻲ ﺗﺤﺪﯾﺪ‬
‫ﻧﻮع اﻟﺤﻘﻮق اﻟﺘﻲ ﯾﺠﻮز ﺑﻴﻌﻬﺎ‪ ،‬ﻛﻤﺎ اﺳـﺘﻌﺮﺿﺖ اﻟﺪراﺳﺔ ﺻﻮر ﻓﺮدﯾﺔ أﺟﺎز ﻓﻴﻬﺎ اﻟﻔﻘﻬﺎء‬
‫ﺑﻴﻊ اﻟﺤﻘﻮق وﺗﻄﺒﻴﻖ ذﻟﻚ ﻋﻠﻰ ﺑﻴﻊ اﻟﺤﻘﻮق ﻓﻲ اﻻﺧﺘﻴﺎرات‪.‬‬
‫وﻣﻦ أﻫﻢ ﻫﺬﻩ اﻟﺼﻮر اﻟﻔﺮدﯾﺔ‪ :‬ﺑﻴﻊ ﺣﻖ اﻟﻤﻠﻜﻴﺔ اﻟﻔﻜﺮﯾﺔ وﺑﻴﻊ ﺧﻴﺎر اﻟﺸﺮط وﺑﻴﻊ ﺣﻖ‬
‫اﻟﺸﻔﻌﺔ‪ ،‬ﻛﻤﺎ ﺗﻌﺮﺿﺖ اﻟﺪراﺳﺔ ﻟﻠﺘﻨﺎزل ﻋﻦ ﺣﻘﻮق اﻻرﺗﻔﺎق واﻟﺘﺤﺠﻴﺮ وﺣﻖ اﻟﻤﺴﺎوﻣﺔ‬
‫وﺣﻖ اﻟﺤﻀﺎﻧﺔ ﺑﻤﻘﺎﺑﻞ ﻣﺎﻟﻲ‪ .‬ﻛﻤﺎ ﺗﻨﺎوﻟﺖ اﻟﺪراﺳﺔ اﻟﻌﻼﻗﺔ ﺑﻴﻦ ﻋﻘﻮد اﻻﺧﺘﻴﺎرات ابﻟﻘﻤﺎر‬
‫وﻗﺪﻣﺖ إﺟﺎﺑﺔ ﻛﺎﻓﻴﺔ‪.‬‬
‫ﻣﻠﺨﺺ اﻟﺒﺤﺚ‬
‫إن أﻫﻤﻴﺔ اﻟﻤﺸـﺘﻘﺎت ﻛﺄدوات ﻣﺎﻟﻴﺔ ﻹدارة اﻟﻤﺨﺎﻃﺮ أﻣﺮ ﻣﺴﻠﻢ ﺑﻪ ﻓﻲ اﻻﻗﺘﺼﺎد‬
‫اﻟﻤﻌﺎﺻﺮ‪ ،‬وﻗﺪ دﻋﺎ ﻋﺪد ﻣﻦ اﻟﻌﻠﻤﺎء واﻟﺒﺎﺣﺜﻴﻦ إﻟﻰ اﻻﺳـﺘﺨﺪام اﻟﺤﺬر ﻟﻬﺬﻩ اﻷدوات ﻓﻲ‬
‫اﻟﻤﻌﺎﻣﻼت اﻹﺳﻼﻣﻴﺔ‪ ،‬إﻻ أن ﻫﺬﻩ اﻷدوات وﺑﺼﻮرﺗﻬﺎ اﻟﺤﺎﻟﻴﺔ ﻻ ﺗﺘﻔﻖ ﺗﻤﺎﻣ ًﺎ ﻣﻊ اﻟﻘﻮاﻋﺪ‬
‫اﻟﻤﺎﻟﻴﺔ اﻹﺳﻼﻣﻴﺔ‪.‬‬
‫ﺗﺒﺪأ اﻟﺪراﺳﺔ ﺑﻨﻘﺪ ﺗﺤﻠﻴﻠﻲ ﻟﻠﺪراﺳﺎت اﻟﺴﺎﺑﻘﺔ ﺛﻢ ﺗﻨﺘﻘﻞ إﻟﻰ دراﺳﺔ ﻛﻞ ﻣﻦ ﻋﻘﺪ‬
‫ﺗﺄﺟﻴﻞ اﻟﺒﺪﻟﻴﻦ‪ ،‬ﻋﻘﻮد اﻟﻤﺴـﺘﻘﺒﻠﻴﺎت‪ ،‬وﻋﻘﻮد اﻻﺧﺘﻴﺎرات ﻣﻦ اﻟﻨﺎﺣﻴﺔ اﻟﺸﺮﻋﻴﺔ‪ .‬ﻛﻤﺎ‬
‫ﺗﺘﻌﺮض اﻟﺪراﺳﺎت إﻟﻰ اﻟﻔﻮاﺋﺪ اﻻﻗﺘﺼﺎدﯾﺔ ﻟﻬﺬﻩ اﻟﻌﻘﻮد وﻃﺒﻴﻌﺘﻬﺎ اﻟﻘﺎﻧﻮﻧﻴﺔ ﻣﻊ ﺗﻘﺪﯾﻢ اﻟﺒﺪﯾﻞ‬
‫ً‬
‫ﺿﺮوراي‪.‬‬ ‫اﻹﺳﻼﻣﻲ ﻣﺘﻰ ﻣﺎ ﺑﺪا ذﻟﻚ‬
‫ﺗﺴـﺘﺨﺪم ﻋﻘﻮد اﻟﻤﺸـﺘﻘﺎت ﻓﻲ أﺳﻮاق اﻟﺴﻠﻊ واﻷﺳﻬﻢ واﻟﻤﻌﻤﻼت واﻟﻤﺆﺷﺮات‪ ،‬وﺳﻌﺮ‬
‫اﻟﻔﺎﺋﺪة إﻻ أن ﻧﻄﺎق ﻫﺬا اﻟﺒﺤﺚ ﻳﺮﻛﺰ ﻋﻠﻰ اﺳـﺘﺨﺪام ﻫﺬﻩ اﻟﻌﻘﻮد ﻓﻲ أﺳﻮاق اﻟﺴﻠﻊ واﻷﺳﻬﻢ‬
‫ﻓﻘﻂ‪ .‬وﯾﻌﻮد ذﻟﻚ إﻟﻰ أن اﺳـﺘﺨﺪام ﻫﺬﻩ اﻟﻌﻘﻮد ﻓﻲ أﺳﻮاق أﺳﻌﺎر اﻟﻔﺎﺋﺪة واﻟﻤﻌﻤﻼت‬
‫ﻣﻦ اﻟﺮاب اﻟﻮاﺿﺢ اﻟﺬي ﻻ ﺧﻼف ﻓﻴﻪ‪ .‬أﻣﺎ اﺳـﺘﺨﺪاﻣﻬﺎ ﻓﻲ أﺳﻮاق اﻟﻤﺆﺷﺮات ﻓﻴﺸـﺘﻤﻞ‬
‫ﻋﻠﻰ ﻏﺮر ﻓﺎﺣﺶ وﻟﺬا أﺧﺮج ﻋﻦ ﻧﻄﺎق ﻫﺬا اﻟﺒﺤﺚ‪.‬‬
‫إن دراﺳﺔ ﻋﻘﺪ ﺗﺄﺟﻴﻞ اﻟﺒﺪﻟﻴﻦ ﺗﺸﻤﻞ اﺳـﺘﺨﺪاﻣﻪ ﻓﻲ أﺳﻮاق اﻟﺴﻠﻊ وإﻣﻜﺎﻧﻴﺔ ﺑﻴﻊ وﺷﺮاء‬
‫اﻟﺬﻫﺐ ﻣﻊ ﺗﺄﺟﻴﻞ اﻟﺒﺪﻟﻴﻦ واﻟﺒﺪﯾﻞ ﻟﺘﺄﺟﻴﻞ اﻟﺒﺪﻟﻴﻦ ﻓﻲ أﺳﻮاق اﻟﻤﻌﻤﻼت‪ .‬وﻫﻜﺬا ﻓﻘﺪ‬
‫أﺟﺮﯾﺖ ﻣﻘﺎرﻧﺔ ﺑﻴﻦ ﻛﻞ ﻣﻦ ﻋﻘﺪ اﻟﺴﻠﻢ واﻻﺳـﺘﺼﻨﺎع وﺑﻴﻊ اﻟﺼﻔﺔ ﻣﻦ ﺟﻬﺔ وﻋﻘﺪ ﺗﺄﺟﻴﻞ‬
‫اﻟﺒﺪﻟﻴﻦ ﻣﻦ ﺟﻬﺔ أﺧﺮى‪ ،‬ﻛﻤﺎ ﺣﺎوﻟﺖ اﻟﺪراﺳﺔ دﺣﺾ اﻟﺰﻋﻢ ﺑﺄﻧﻪ ﻻ ﺗﻮﺟﺪ أي ﻓﺎﺋﺪة ﻣﻦ‬
‫ﻋﻘﻮد ﺗﺄﺟﻴﻞ اﻟﺒﺪﻟﻴﻦ أو أﻧﻬﺎ ﺗﺨﺎﻟﻒ ﻣﺒﺪأ ”ﻻ ﺗﺒﻊ ﻣﺎ ﻟﻴﺲ ﻋﻨﺪك“‪.‬‬
‫أﻣﺎ ﻋﻦ ﺗﺄﺟﻴﻞ اﻟﺒﺪﻟﻴﻦ ﻓﻲ ﺑﻴﻊ وﺷﺮاء اﻟﺬﻫﺐ ﻓﻘﺪ ﺑﺪأت اﻟﺪراﺳﺔ ﺑﻨﺒﺬة اترﯾﺨﻴﺔ‬
‫ﻣﻮﺟﺰة ﻋﻦ اﻟﻨﻈﺎم اﻟﻨﻘﺪي اﻟﻌﺎﻟﻤﻲ ﺗﻠﺘﻬﺎ دراﺳﺔ ﻧﻘﺪﯾﺔ ﻟﻌﺪد ﻣﻦ اﻟﻔﺘﺎوى ﻋﻦ ﺗﺠﺎرة اﻟﺬﻫﺐ‬
‫ﺛﻢ ﻓﺼﻠﺖ اﻟﻘﻮل ﻓﻲ اﻟﻌﻠﺔ وراء ﻣﻨﻊ اﻟﺸﺎرع ﻟﺒﻴﻊ وﺷﺮاء اﻟﺬﻫﺐ ﻣﺆﺟﻼ وﻣﺪى ﺗﺄﺛﻴﺮ‬
‫ذﻟﻚ إذا ﻓﻘﺪ اﻟﺬﻫﺐ ﻓﻲ اﻟﻌﺼﺮ اﻟﺤﺎﺿﺮ ﺗﻠﻚ اﻟﻌﻠﺔ ‪.‬واﻟﻐﺮض اﻷﺳﺎﺳﻲ ﻣﻦ ﺑﺤﺚ ﻫﺬﻩ‬
‫اﻟﺠﺰﺋﻴﺔ ﻫﻮ اﺳﺘﻨﻬﺎض اﻟﻬﻤﻢ ﻟﻤﺰﯾﺪ ﻣﻦ اﻟﺒﺤﺚ ﺣﻮل ﻫﺬﻩ اﻟﻘﻀﻴﺔ ﻧﻈﺮا ﻟﺘﺄﺛﻴﺮﻫﺎ اﻟﻜﺒﻴﺮ‬
‫ﻋﻠﻰ ﻧﻈﺎم اﻟﺼﻴﺮﻓﺔ اﻹﺳﻼﻣﻴﺔ ﻛﻜﻞ‪.‬‬
‫أﻣﺎ ﻋﻦ اﻟﺒﺪاﺋﻞ ﻟﺘﺄﺟﻴﻞ ﻓﻲ أﺳﻮاق اﻟﻌﻤﻼت ﻓﻘﺪ انﻗﺸﺖ اﻟﺪراﺳﺔ ﻋﺪة ﻣﻘﺘﺮﺣﺎت‬
‫أﻫﻤﻬﺎ‪ :‬اﻟﻤﻮاﻋﺪة ﻓﻲ اﻟﺼﺮف‪ ،‬ﻣﺒﺎدﻟﺔ اﻟﻘﺮوض اﻟﺤﺴـﻨﺔ وﻧﻈﺎم ﺳﻠﺔ اﻟﻤﻌﺎﻣﻼت وﺻﻴﻐﺔ‬
‫اﻟﺼﻨﺪوق اﻟﺘﻌﺎوﻧﻲ‪.‬‬
‫أﻣﺎ ﻋﻦ دراﺳﺔ اﻟﻤﺴـﺘﻘﺒﻠﻴﺎت ﻓﻘﺪ ﺗﻌﺮﺿﺖ اﻟﺪراﺳﺔ ابﻟﻨﻘﺪ ﻟﻠﺤﺠﺞ واﻷدﻟﺔ اﻟﻤﺤﺮﻣﺔ ﻟﻬﺬﻩ‬
‫اﻟﻌﻘﻮد‪ ،‬ﺧﺎﺻﺔ ﻓﻴﻤﺎ ﯾﺘﻌﻠﻖ ﺑﻌﻼﻗﺔ ﻫﺬﻩ اﻟﻌﻘﻮد ابﻟﺒﻴﻊ ﻗﺒﻞ اﻟﻘﺒﺾ وﺑﻴﻊ اﻟﺪﻳﻦ وﻋﻤﻠﻴﺎت‬
‫اﻟﺘﺤﻮط واﻟﻤﻀﺎرﺑﺔ وﻋﻼﻗﺔ ذﻟﻚ ابﻧﻬﻴﺎر اﻷﺳﻮاق اﻟﻤﺎﻟﻴﺔ‪ .‬ﻛﻤﺎ ﺗﻌﺮﺿﺖ اﻟﺪراﺳﺔ ﻷﻫﻤﻴﺔ ﻏﺮﻓﺔ‬

Risk Management in Islamic Finance

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Risk Management in Islamic Finance

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Risk Management in Islamic Finance

Brill’s Arab and

Al-Amine, Muhammad Al-Bashir Muhammad.

KBP962.8 .A43 2008

Copyright 2008 by Koninklijke Brill NV, Leiden, The Netherlands.

All rights reserved. No part of this publication may be reproduced, translated,

Authorization to photocopy items for internal or personal use is granted by

printed in the netherlands

List of Tables ......................................................................................... ix

Chapter One Introduction ............................................................ 1

Chapter Two The Forward Commodities Market ..................... 44

Chapter Three Is it Permissible to Exchange Gold with

Chapter Four The Forward Market for Currencies ................... 94

THE FUTURES MARKET

Chapter Five Concept, Scope of Futures Contracts and

Chapter Six Sale Prior to Taking Possession, Sale of Debt

Chapter Seven Futures Market Regulation ................................. 177

THE OPTIONS MARKET

Chapter Eight Concept and Scope ............................................... 195

Chapter Nine Khiyār Al-Sharṭ , Risk Management and

Chapter Ten ʿArbūn Risk Management and Options ............... 237

Chapter Eleven The Sale of Pure Rights and the Legality

Conclusion .......................................................................................... 299

Glossary of Arabic Terms ................................................................. 309

Bibliography ........................................................................................ 319

Index .................................................................................................... 329

Abstract ............................................................................................... 333

‫ﻣﻠﺨﺺ اﻟﺒﺤﺚ‬ .......................................................................................... 338

1.1 Opinion of Major Schools on the Conditions of Salam .... 53

2.2 Comparison Between Futures and Forward Contracts ..... 126

Company Act 187

Futures Industry Act 11; 12; 18; 159;

Securities Industry Act 11; 12; 247

Sydney Futures Exchange Ltd v. Australian Stock Exchange

Richardson Greenshields of Canada(Pacific) LtD v. Keug

All praise to Allah (s w t) the most Gracious and most Merciful, by

Muhammad Taqi Usmani is a retired Justice of the Shariʾat Appellate

Mohamed Ali El-Gari is a professor of Islamic Economics at King

Abdullah Bin Suleiman Al-Maniya is a member of the Senior Ulema

Abdul Sattar Abu Ghuddah is the Shariʾah Advisor and Director,

Ahmad Bazie Al-Yaseen was former Chairman of Kuwait Finance

Ajeel Jasem Al-Nashmi is a Professor of Shariʾah in Kuwait University

Muhammed Ali Al Taskhiri is Secretary General of the World Forum

Wahba Mustafa Al-Zuhalli is former Dean of the Department of

Ahmad Ali Abdullah is Secretary General of the Higher Council of

Mohammad Mukhtar al-Salami is the former Grand Mufti of Tuni-

Ali al-Salus Professor of Shariah at Qatar University and Member

Sayyid Abdul Jabbar Shahhabudin, Former Chief Executive of the

Nazih Hammad is a former Professor at the College of Shariah, Um

Obiyathullah Associate Professor at the Faculty of Economics and

Zamir Iqbal is an Information Officer in the World Bank’s Treasury.

Saleh al-Marzuqi Professor of Shariah Um al-Qura University and the

Abd Allah bin Beya of the leading contemporary Muslim scholars. He

Abd al-Wahhab Abu Sulaiman, member of the Council of Great scholar

Siddq Al-Darir Professor at the faculty of Laws Khartoum university,

Fahim Khan is associated with the Islamic Research and Training

Umar Charpa is currently serving as Research Advisor at the Islamic

Mohammad Hashim Kamali is currently Professor of Islamic law and

Rafiq al-Misri is member of the faculty of economics and Management

Abdel-Hamid al-Ghazali member of the faculty of economics and

Mohammed Obaidullah is a Senior Economist with the Islamic Research

Muhammad Akram Khan is a Pakistani scholar of Islamic law with

Obaiyathullah Ismath Bacha Professor at the faculty of economics and